Even though it's been earning more per dollar lent than other big banks, shares of PNC Financial Services Group Inc., the Pittsburgh-based Provident National Bank descendant that now ranks among the top 10 U.S. banking companies, trade at a discount to other big U.S. banks: just 11X next year's expected earnings/share, vs 12.5X for other big banks. It's as if investors are expecting profits to drop this year -- which is likely, given the drop in mortgage lending, writes Terry McEvoy, in a report today to clients of investment bank Sterne, Agee & Leach Inc.
But McEvoy says that decline is already baked into PNC's share price, so there are stronger reasons to buy PNC shares; he's predicting the share price, lately around $85, will rise within the year to $100. Why?
- Rising interest rates: PNC says its mix of loans, deposits and investments will translate to increased profits at a rate more than twice the magnitude of future Fed rate increases -- a bigger multiple than most of its rivals report.
- South: "PNC is two years into transitioning its Southern operations," sleepy local branches which have been "a drag" on profits since purchased from Royal Bank of Canada three years back, into "full service retail and commercial" offices that have been adding loans and investments more rapidly than rivals.
- Midwest: Like the RBC deal, PNC's 2008 government-backed mid-crisis purchase of National City Corp. "looked like (a) dented up Ford Pinto running out of gas, with PNC paying a fitting price." But PNC "has done more than just slap a fresh coat of orange and blue paint," and has grown its market share in Chicago and Michigan, too (though more than one-third of PNC's business is still in its native Pennsylvania.).
- Old investments: PNC owns more than $11 billion worth of the BlackRock investment group and nearly $1 billion worth of Visa -- both purchased years ago at a fraction of today's values -- and has been selling the Visa shares to juice profits.