3 Reasons This Bank's Best Days Are Ahead

While Bank of America, Wells Fargo, Capital One and US Bancorp receive a lot of attention, it turns out PNC may be one of the best banks to buy now.

Feb 18, 2014 at 7:00PM

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Photo: Wikimedia Commons/AgnosticPreachersKid

Banks have been on an incredible run over the past few years since the bottom of the financial crisis, but one bank may still have more room for growth ahead of it.

PNC (NYSE:PNC) is in an interesting place as the seventh largest bank in the U.S. by when looking at total deposits. While it may find itself in the second tier of banks when considering only its size, as it turns out, it may be at the top of the list when it comes to investments. And there are three key reasons why.

1. Pivotal improvement
PNC noted it surpassed a collection of 12 of its peers in almost every pertinent metric to evaluate how well it performed in 2013 relative to 2012. It ranked first in loan growth at 5%, its 3% growth in revenues came in fourth, its expense reductions of 7% were good for second, and its pre-tax pre-provision earnings growth of 26% placed it second. 

Against peers like Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), US Bancorp (NYSE:USB), and Capital One (NYSE:COF), it performed resoundingly well:

Images
Source: Company investor presentations / SNL Datasource.

Its net income of $4.2 billion was a record for the company, and while its return on average assets of 1.4% and equity of almost 11% didn't match that posted by the likes of Wells Fargo and US Bancorp, PNC doesn't command nearly as high a valuation:

Images
Source: Company investor relations.

Certainly, improvement in key areas and an attractive valuation are enough to pique the interests of many, but it turns out PNC has more to it than those things.

2. Execution on expansion
PNC is headquartered in Pittsburgh and for most of its existence focused its efforts in the Midwest and the Northeast. Yet following its acquisition of the United States operations of RBC, it began to aggressively pursue expansion in the Southeast, and 2013 marked a year of significant growth.

Its total consumer and small business relationships grew by 11%, and total customers was up 5% to 732,000. Yet perhaps even more impressive was the growth in its new primary clients for its asset management group -- who PNC expects to generate more than $10,000 per client in annual revenue from -- which grew from 210 new clients in 2012 to 395 in 2013. This helps partially explain why its total assets under administration grew from $224 billion to $247 billion, an increase of 10%.

Pnc

In September, CEO Bill Demchak noted PNC's "expansion into the Southeast offers a lot of opportunity to experiment in order to figure out what works best for our customers," and with resounding gains from its business operations in the Southeast, it seems what is best for its customers is truly what is best for PNC as well.

3. Room for growth
There's no denying 2013 marked a year of strong performance and growth for PNC, and in total its net income was up more than 30% on the year. Yet it also must be noted the bank still ultimately has further room for improvement, and as shown above it could have higher return metrics relative to its peers, and its efficiency ratio -- which measures how effective it is in utilizing expenses to generate revenue -- is also on the higher side at 61%.

However, this reality can be taken in two ways, it can be a red flag that causes investors to think other banks are more attractive, or it can be a sign the best is ahead of PNC. When you consider it executed on its previous initiatives and maintains an attractive valuation, the best days for both PNC and its shareholders are ahead of it.

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Patrick Morris owns shares of Bank of America and US Bancorp. The Motley Fool recommends Bank of America and Wells Fargo and owns shares of Bank of America, Capital One Financial, PNC Financial Services, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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