PNC is a 'unique' bank stock earnings play: Analyst
Terry McEvoy says PNC is poised to improve its earning and see a share price multiple expansion in 2013.
Shares of PNC Financial Services Group (PNC) have underperformed this year, but Oppenheimer analyst Terry McEvoy sees price "multiple expansion" ahead for the Pittsburgh lender.
PNC's shares closed at $63.80 Friday, returning 13% year-to-date, trailing the 25% return for the KBW Bank Index (I:BKX), and all but four of the 24 index components.
McEvoy on Sunday upgraded PNC to an "outperform" rating from "perform," with a price target of $75, saying that the company's acquisition of RBC Bank (USA) in March is "an ideal platform for PNC to expand market share in the Southeast." He added that "the merits behind this deal should become more visible in 2H12 and the accretable yield "bucket" is now full with the newly acquired assets estimated to drive 10-12% net interest income growth over the coming quarters."
PNC's earnings growth
PNC's expected earnings growth in 2013 stands in contrast to "a growing list of banks is now expected to report negative year-over-year growth in 2013 earnings," and "the solid revenue visibility, internal capital generation and attractive valuation outweigh any lingering risk connected to higher mortgage repurchase demands," according to McEvoy.
The year-to-date underperformance in part reflects investors' concerns over increased mortgage repurchase demands, with PNC reporting a second-quarter mortgage putback provision of $438 million, feeding an earnings miss, and McEvoy said that "another $350 million could be recorded," while pointing out that a charge of that magnitude would be only "a ~10bps hit to capital."
A major silver lining for PNC during the second quarter was that the company's net interest margin -- the spread between the average yield on loans and investments and the average cost for deposits and borrowings -- expanded to 4.08%, from 3.90% the previous quarter, and 3.93% a year earlier. Most large regional banks have seen continual margin pressure, as the Federal Reserve has continued buying long-term securities in an effort to push long-term rates down.
PNC is 'unique'
McEvoy said that "PNC is unique within the banking industry in that its tangible book value grew from $17.61 at the end of 2007 to almost $45 today, and the company was profitable every year over that period generating a return on assets of over 1.10% last year." The analyst said that the company's purchase in 2008 of the troubled National City Corp. and this year's $3.5 billion acquisition of RBC Bank (USA) -- which included 424 branches in North Carolina, Florida, Alabama, Georgia, Virginia and South Carolina at a price below tangible book value -- "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."
Over the past two years, large banks have seen a major boost to earnings, through the release of loan loss reserves. "With reserve releasing coming to an end, margins compressing and mortgage banking less active next year," McEvoy said that "a growing list of regional banks that are now expected to report negative year-over-year growth in earnings in 2013," including Fifth Third (FITB), Huntington Bancshares (HBAN), Comerica (CMA), KeyCorp (KEY), and Cullen/Frost Banker (CFR).
McEvoy estimates that PNC will earn $5.62 a share for all of 2012, followed by 2013 earnings per share of $6.50.
Fifth Third Bancorp downgraded
McEvoy on Monday also downgraded Fifth Third Bancorp to a "perform" rating, from "outperform," citing "outperformance in price," and the Federal Reserve's approval of the company's revised capital plan.
Fifth Third's shares closed at $15.31 Friday, returning 22% year-to-date, following an 11% decline during 2011.
The shares trade for 1.4 times tangible book value, and for 10 times the consensus 2013 earnings per share estimate of $1.58, among analysts polled by Thomson Reuters. The consensus 2012 earnings per share estimate is $1.60.
After the Federal Reserve in March only partially approved Fifth Third's annual capital plan, allowing the company to repurchase $1.4 billion in trust preferred securities and buy back common shares in amounts equal to after-tax gains from the sale of shares in Vantiv (VNTV), Fifth Third on Aug. 21 announced that the regulator had approved its revised capital plan, which "included the potential increase of the quarterly common stock dividend to $0.10 in the third quarter of 2012 and the potential repurchase of common shares."
Fifth Third's board of directors authorized the repurchase of up to 100 million common shares, including "potential common share repurchases of up to $600 million through the first quarter of 2013, in addition to any incremental repurchases related to any after-tax gains from the sale of Vantiv, Inc. stock."
McEvoy said that "solid loan growth across the company's Midwest footprint and an active mortgage banking environment have contributed to Fifth Third's above-peer profitability and stock price performance," but lowered his rating and rescinded his $17 price target for Fifth Third's shares, because "at this point we struggle to find the next company-specific catalyst to improve FITB's valuations."
As one of many large regional bank holding companies expected to see reduced earnings in 2013, McEvoy said "we feel Fifth Third could look to fill this earnings hole with a deal in the Midwest given their acquisitive history, which could limit multiple expansion," and that "potential targets may be TCF Financial (TCB) or Citizens Republic (CRBC)."
The analyst estimates that Fifth Third will earn $1.62 a share for all of 2012, followed by 2013 earnings per share of $1.55.
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