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Friday, October 23, 2009
Is PNC really stronger than Wells Fargo?

Wells Fargo & Co., the fourth-largest bank in the U.S. and No. 1 in the Philadelphia area since it bought Wachovia Bank last year, reported "record" profits Wednesday. The stock fell 5%, and isn't back yet.

PNC Financial Services Group, the fifth-largest US bank and No. 1 in Pennsylvania, also reported higher-than-expected profits, on Thursday. The stock is up 18% since then.

Why the difference? "Wells is concentrated in California real estate; PNC is more diversified, and in the Northeast Corridor," David Hendler, head of bond analysts CreditSights Inc., told me.

But stock-watchers were surprised by PNC's positive report. On Wednesday,  Janney Montgomery Scott analyst Richard D. Weiss in Philadelphia had told clients the stock was overpriced at $45. Four days later, with the stock soaring, Weiss "raised our 12-month fair value estimate" - to $45 - but added that "the market's reaction... is overly optimistic," since PNC's bad loans are rising, and "there is no evidence that a broad-based economic recovery is imminent."

Other PNC skeptics: "It is not clear if all of the upside in the quarter is sustainable," wrote Matt O'Connor at Deutsche Bank, citing the threat of higher loan losses. PNC "credit risks linger," agreed Paul J. Miller Jr. at Friedman Billings Ramsey & Co. in Richmond.

"We found PNC's 3q09 earnings to be among the most surprising we have seen in some time," wrote R. Scott Seifers and Will Curtiss at Sandler O'Neill + Partners.  "We were caught off guard by this rapid turn for the positive... The outlook implies that the company shoulod be able to sustain or even improve upon this quarter's performance," though that hope has been quickly reflected in the stock's higher price. After sounding that cautious note, they boosted their target for PNC stock, to $56.

And rival Wells Fargo's bank analyst Maththew Burnell on Friday rated PNC "Outperform."

What about Wells Fargo? The stock bounced partway back Thursday, before slipping again Friday morning. Richard X. Bove of Rochdale Research, whose "Sell" rating hurt the stock Wednesday, wrote a more detailed report Friday, citing Wells' lack of business growth, its "struggle" to maintain profit margins, rising loan losses, and a likely need to raise more capital as reasons for doubting Wells owners deserve a better price.

Posted by Joseph N. DiStefano @ 11:23 AM  Permalink | Post a comment
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About Joseph N. DiStefano
Joseph N. DiStefano writes this blog to feed his PhillyDeals column, which is printed in the business pages of The Philadelphia Inquirer every Sunday, Tuesday, Wednesday, Thursday and Friday. Joe has worked at the Inquirer, mostly, since 1988. He has also written for Bloomberg and Gannett, authored the book Comcasted, majored in economics at Penn, and fathered six children. Reach Joe at 215-854-5194 and JoeD@phillynews.com

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