PNC Financial: A Strong, Under-the-Radar Bank Headed In the Right Direction

Increasing earnings, improving asset quality and strong book value growth justify premium valuation.

Jun 16, 2014 at 3:07PM

PNC Financial's (NYSE:PNC) focus on its deposit, lending and asset management business has yielded great results for shareholder over the last two years. In 2011, PNC Financial's tangible book value stood at just $44.38 and has now increased to $56.33 in the first quarter of 2014 driven by higher earnings from its asset management and residential mortgage business.

PNC Financial did a great job at compounding book value and the stock now trades at a 55% premium to tangible book value. With about $17 per share in intangible assets, though, PNC Financial trades at just an 18% premium to total book value.

With increasing book values, improving asset quality and record earnings in 2013, PNC Financial is clearly an interesting regional bank alternative to other high-profile banks in the financial sector.

PNC Financial flies under the radar
Many Wall Street institutions and fund managers solely concentrate on high-profile banking institutions such as Bank of AmericaCitigroup and Wells Fargo when they want to gain financial services exposure. Large-cap banking institutions like the ones mentioned above do not only have a larger domestic branch network, but also international exposure to strategic growth markets, for instance, in Asia and Latin America.

However, investors neglect the second league of financial institutions which actually make quite attractive value propositions, too.

G
Source: Wikimedia Commons.

The financial crisis is still fresh in investors' minds and banking firms are not on the preferred shopping list of U.S. investors yet. That, however, could be a big mistake.

Since the U.S. economy is still not growing as strongly as it could, bank earnings have substantial room to grow. Broadly positioned banking institutions like PNC Financial are set to reap the rewards that come with stronger economic growth and rebounding demand for commercial banking, mortgage lending as well as asset management services.

While large-cap banks like Bank of America and Citigroup are constantly in the headlines because of settlement and litigation issues, PNC Financial takes on a low-profile role, but is nonetheless strongly growing its core business.

Solid business fundamentals
From 2011 to 2013, PNC Financial's grew revenues increased from $15.8 billion to $16.9 billion: A solid plus of 7% in an arguably difficult banking environment.

Over the same time, PNC Financial's net income skyrocketed by an even higher growth rate of 38% from $3.1 billion to $4.2 billion. Better commercial lending performance and tight cost controls have led to record earnings in 2013, a year in which other banks still struggled with litigation expenses and settlements.

Another theme worth mentioning is PNC Financial's improving underlying asset quality. Despite a short-lived spike in non-performing loans and net charge-offs in the first quarter of 2013, the trend clearly indicates that PNC Financial's asset quality is rapidly improving (see chart below). Troubled loans and net charge-offs have materially improved since the fourth quarter of last year.

G

(Source: PNC Financial Fourth Quarter and Full Year 2013 Results Presentation)

Final assessment
Since PNC Financial has a convincing record of increasing earnings and book value, the premium multiples do not seem to be out of touch with the underlying fundamentals. Second league banks like PNC Financial should benefit handsomely from an improving U.S. economy and stronger growth in the years ahead.

These stocks beat the big banks...
Here's your chance to pocket big dividends. Over time, dividends can make you significantly richer. And guess what? The big banks are laggards when it comes to paying dividends. So instead of waiting for a cash windfall that may never come, check out these stocks that are paying big dividends to their investors RIGHT NOW. Click here for the exclusive free report.

Kingkarn Amjaroen owns shares of Bank of America. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup, PNC Financial Services, and Wells Fargo and has the following options: short June 2014 $48 puts on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers