PNC Leads as Most Bank Stocks Trade Sideways

NEW YORK ( TheStreet) -- PNC Financial Services Group ( PNC) was the banking sector leader on Friday, with shares rising 1.2% to close at $78.20, on a Friday that saw most bank stocks trading sideways.

The broad indices ended with modest losses on a day of very light trading volume, putting a stop to the "Santa Claus" rally that saw the Dow Jones Industrial Average hitting a record high on Thursday.

The Dow has risen 26% this year, while the S&P 500 is up 29% and the NASDAQ Composite has added 38%.

The KBW Bank Index ( I:BKX) on Friday dipped slightly to 69.08, with 15 of the 24 index components showing losses.  The index has returned 35% this year, following a 30% return during 2012. 

Friday was  very light day for banking industry news, although Barclays PLC ( BCS) was slapped with a small fine by the Financial Institutions Regulatory Authority (FINRA), "for systemic failures to preserve electronic records and certain emails and instant messages in the manner required for a period of at least 10 years."  The fine was just $3.75 million, and Barclays still faces at least one major regulatory headache after a rough two years.

Barclays' American depository receipts rose 1.2% to $18.02, in trading on the New York Stock Exchange .

Volcker

Late on Friday, the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency said in a joint press release they were reviewing whether it would be appropriate and consistent with the Dodd-Frank Wall Street Reform and Consumer Protection Act not to subject collateralized debt obligations backed by trust preferred securities to the investment prohibitions of section 619 of Dodd-Frank, otherwise known as the 'Volcker rule.'

This means community banks fearing they may be forced to book large fourth-quarter losses on the movement of the currently banned securities could get some breathing room, although the agencies said they would "address the matter no later than January 15, 2014."

The regulators seem to be backing off a bit from their objection to a request, and then a lawsuit,  by several community banks and the American Bankers Association not to implement the Volcker Rule's ban on CDOs backed by trust preferred securities.

The regulators are due in court on Monday to respond to the ABA's challenge, which they didn't comment on, in their press release Friday.

PNC

PNC Financial Services Group of Pittsburgh has seen its stock return 38% this year, after underperforming with just a 4% return during 2012.  The shares trade for 1.5 times tangible book value, according to Thomson Reuters Bank Insight.  The shares trade for 11.3 times the consensus 2014 earnings estimate of $6.94 a share, and for 10.5 times the consensus 2015 EPS estimate of $7.45.

Based on a quarterly payout of 44 cents, the shares have a dividend yield of 2.25%.

It's logical for investors to assume that bank stocks won't outperform during 2014 as they have done this year and last, however, there are some catalysts for investors to look forward to.  For starters, the Federal Reserve will conduct its next round of stress tests and capital plan reviews for major U.S. banks in March, after which investors can expect the usual wave of dividend increases and stock buyback announcements.

Another positive development for many banks that may happen during during 2014 is a parallel rise in interest rates, although this may be more likely for 2015.  Long-term interest rates have risen considerably during 2013, as investors anticipated the decision by the Federal Open Market Committee to begin tapering the Federal Reserve's bond purchases.  The market yield on 10-year U.S. Treasury bonds rose by one basis point on Friday to 3.01%.  The yield on the 10-year bond has risen from 1.70% at the end of April.

But the Fed has kept the short-term federal funds rate in a target range of zero to 0.25% since late 2008, which continues to pressure banks' net interest margins.  The FOMC has repeatedly said it is unlikely to raise the federal funds rate until the U.S. unemployment rate falls below 6.5%.  The unemployment rate improved to 7.0% in November from 7.3% in October.  And the FOMC may wait considerably longer to raise the federal funds rate.

In its third-quarter 10-Q filing, PNC said the effect of a gradual 1.00% parallel rise interest rates over a 12-month period would be to increase its net interest income by 2.1% in the first year, but by a much more significant 7.1% the following year.  And once the Fed starts moving, the federal funds rate could rise much faster than that.

Jefferies analyst Ken Usdin rates PNC a "buy," with a price target of $84.00, based on a multiple of 12.5 to his 2014 EPS estimate of $7.15.  After meetings with PNC management, the analyst in a note late in November wrote "we continue to like progress on several fronts: 1) loan growth share gains, 2) fee [growth opportunities]; 3) underlying cost control; 4) capital return positioning."

The following chart shows the performance of PNC's stock this year against the KBW Bank Index and the S&P 500:

PNC Chart data by YCharts

Interested in more on PNC Financial Services Group? See TheStreet Ratings' report card for this stock.

-- 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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