PNC Is 'Goldilocks' Among Big Banks: Oppenheimer

NEW YORK ( TheStreet) -- The Federal Reserve's stress tests confirmed that PNC Financial Services Group ( PNC) is "not too big and not too small," according to Oppenheimer analyst Terry McEvoy," supporting a higher valuation for the bank's shares.

PNC Financial Services group of Pittsburgh had $301 billion in total assets and an estimated Tier 1 common equity ratio at the end of the third quarter, on which the stress tests were based.

The bank sailed through the first round of stress tests, with the Federal Reserve projecting that under a "severely adverse scenario," with a brutal recession beginning in 2013, PNC would have relatively slight losses totaling $1.4 billion through the end of 2014, with a minimum Tier 1 common equity ratio of 8.7%.

That indicates plenty of excess regulatory capital above the minimum Tier 1 common equity ratio needed for banks to be considered well-capitalized under the stress tests. Among the 18 large financial holding companies going through the first round of stress tests, only three had higher projected minimum Tier 1 common equity ratios under the severely adverse scenario, including American Express ( AXP), and the trust and custody giants Bank of New York Mellon ( BK ) and State Street ( STT).

McEvoy in a report late Wednesday said the bank's "ideal size combined with PNC's diverse revenue stream should support future multiple expansion."

PNC's shares closed at $65.93 Wednesday, trading for 1.3 times tangible book value, and for 9.6 times the consensus 2014 earnings estimate of $6.84 a share, among analysts polled by Thomson Reuters.

"We believe the valuation gap between other high-quality banks (i.e., USB and BBT) and PNC will narrow, especially as the market begins to appreciate the merits behind the RBC bank deal," McEvoy wrote. The analyst rates PNC "outperform," with a 12- to 18-month price target of $72.00.

Shares of BB&T ( BBT) of Winston-Salem, N.C., closed at $31.57 Wednesday, trading for twice tangible book value, and for 10.0 times the consensus 2014 EPS estimate of $3.15.

U.S. Bancorp ( USB) of Minneapolis closed at $34.22 Thursday, trading for 2.7 times tangible book value, and for 10.4 times the consensus 2014 EPS estimate of $3.29.

PNC is in pretty good company when compared with BB&T and U.S. Bancorp. All three companies sailed through the credit crisis, remaining profitable on an annual basis from 2007 through 2008. PNC was the only one of the three banks to report a quarterly loss during that five-year period, in the fourth quarter of 2008, when the company reported a net loss of $248 million, or 77 cents a share. That quarter's results included $380 million in expenses and loan loss reserve provisions, after tax, from the acquisition of National City.

PNC's operating return on average assets was 1.02% and the ROA has ranged from 0.88% to 1.29% over the past four years, according to Thomson Reuters Bank Insight. BB&T's ROA over the same period has ranged from 0.51% to 1.11%, which was the ROA for 2012. U.S. Bancorp's ROA has risen over the past four years from 0.82% in 2009 to 1.65% in 2012.

PNC's $3.6 billion acquisition of RBC Bank (USA) brought on $18.1 billion in deposits, $14.5 billion in loans and 424 branches in North Carolina, Florida, Alabama, Georgia, Virginia and South Carolina. When upgrading PNC to the current "outperform" rating in September, McEvoy said the acquisition of RBC Bank (USA) and the company's purchase of the troubled National City in 2008, "were more than just financial engineering but also strategic moves that allowed PNC to enter new markets with a better product mix and sales culture."

Stress Tests Part 2: Thursday


The second part of the stress tests is the Comprehensive Capital Analysis and Review (CCAR), which applies the banks' plans for the deployment of excess capital through dividend increases, share buybacks or acquisitions, to the severely adverse scenario, in order to make sure they would still remain well-capitalized. The Fed will release the CCAR results at 4:30 p.m. EST on Thursday, after which most of the big banks are expected immediately to announce dividend increases and/or share buybacks.

PNC currently pays a quarterly dividend of 40 cents a share, for a yield of 2.43%, based on Wednesday's closing price. McEvoy expects the bank to announce a modest dividend increase to 42 cents a share, but not to announce any buybacks through the first quarter of 2014, since the company is focused on rebuilding capital, following the acquisition of RBC Bank (USA) in March 2012.

McEvoy wrote that "our positive fundamental view of PNC Financial remains centered on the company's ability to successfully capitalize on customer and revenue growth opportunities across all of its markets, most notably in the Southeast."

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., 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.

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