BlackRock Makes PNC More Attractive: Is It Safe?

PNC shares seem pricey, but the company's stake in money manager BlackRock could make the bank a worthwhile long-term play.
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PITTSBURGH (

TheStreet

) -- Shares of

PNC Financial Services

(PNC) - Get Report

seem pricey, but the company's 46.5% stake in money manager

BlackRock

(BLK) - Get Report

could make the bank a worthwhile long-term play.

BlackRock agreed in June to buy

Barclays'

(BCS) - Get Report

asset management arm for $6.6 billion in cash and 37.8 million BlackRock shares. PNC is helping BlackRock finance the transaction with a $500 million preferred investment. While the deal will dilute PNC's position, the bank is expecting a $500 million gain when the deal is completed in December.

PNC, the fifth-largest U.S. bank holding company with $280 billion in assets as of June, was one of 10 companies ordered to raise capital after government "stress tests" of the nation's 19 biggest banks last spring. While the company raised $624 million and remains

well-capitalized

, its shares continue to trail those of other banks.

Since the

S&P 500 Financials Index

bottomed on March 6, PNC shares have climbed 97%, compared to 123% for the benchmark. Among the 18 publicly-traded companies subjected to stress tests, PNC had the worst-performing stock.

Fifth Third Bancorp

(FITB) - Get Report

, in contrast, returned 624%, while

Bank of America

(BAC) - Get Report

and

Citigroup

(C) - Get Report

each rose more than 300%.

Despite their weak performance, PNC shares were selling for 2.23 times tangible book value as of Friday. Among the tested companies, PNC's shares are the sixth most expensive, according to

SNL Financial

.

State Street

(STT) - Get Report

and

Bank of New York Mellon

(BK) - Get Report

, companies with little exposure to problem loans, lead the list with multiples of about 4.5.

In an Aug. 24 report by

AllianceBernstein Holding

(AB) - Get Report

, analyst John E. McDonald downgraded PNC shares to "market perform," citing their relatively high valuation and "shrinking earnings cushion and capital ratios that lag peers."

The silver lining is PNC's position in BlackRock. PNC is carrying its BlackRock common shares at $100 each, amounting to a "silent" unrealized gain on its balance sheet of about $4.3 billion, including the expected gain from the Barclays deal, McDonald's report says.

The Barclays deal will also boost BlackRock's assets under management by $2.8 trillion, helping it contribute more to PNC's bottom line. In an Aug. 3 report,

Goldman Sachs

(GS) - Get Report

analyst Marc Irizarry predicted BlackRock would reap $848 million in net income in 2010 from the Barclays assets, exceeding BlackRock's original estimate of $695 million. Goldman Sachs rates the bank "buy" and has a neutral rating for PNC.

In the second quarter, BlackRock posted $218 million in net income, down 20% from a year earlier, but up 160% from the first quarter. Assets under management were $1.4 trillion as of June 30, with net inflows of $15.2 billion, or 7% from the previous quarter.

Meanwhile, PNC's second-quarter net income fell 61% to $197 million from $505 million a year earlier, the amount gained from the BlackRock stake declined by 22% to $54 million from $69 million. Second quarter results also included $80 million from adjustments in the values of the BlackRock positions.

More troubling was the increase of PNC's nonperforming assets, loans past due by 90 days or more. These loans comprised 2.88% of total assets as of June 30, up from 2.19% the previous quarter, as nonaccrual construction and commercial real estate loans increased sharply.

With asset quality headwinds and the stock having risen so much recently, PNC is not safe over the short term. But for investors willing to build a position slowly while taking advantage of market pullbacks, the company's stake in BlackRock makes it a fascinating long-term bet. We rate PNC "hold."

--

Reported by Philip van Doorn in Jupiter Fla.

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TheStreet.com Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.

Philip W. van Doorn joined TheStreet.com Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.