I'd like to open this piece by wishing readers a healthy and prosperous New Year. During a holiday flight home from Fort Lauderdale, FL to Cleveland, OH, I had the opportunity to read the December 24 issue of Barron's Magazine. One of the cover stories titled PNC's Promising Outlook caught my eye, as PNC served as my hometown bank in the Midwest and has an expanding presence in South Florida.

Overall I feel Barron's is a high-quality publication and is part of my weekly ritual as an investor. At a minimum, the magazine serves as a great resource for idea generation, and secondly it warrants being read as so many others choose to follow it.

Given the above disclosure, however, I feel the editors at Barron's are overly cheerful on PNC Financial (NYSE: PNC) for 2013.

A key distinction between the Barron's article and my own lies in the interpretation of two important technical terms: purchase accounting accretion and net interest margin.

PNC Financial received more than $1 billion in PAA-related revenue during each of the last three fiscal years. However, management has already guided lower for 2013, indicating a diminishing revenue stream effective in coming quarters. PNC has disclosed it plans to recognize only $650 million from PAA during the current fiscal year, and revenue is expected to reach only $450 million for 2014. Purchase accounting accretion takes place when PNC is able to mark-up the value of an improving loan portfolio, mainly related to its 2008 acquisition of NationalCity.

Barron's suggests that a decreased PAA contribution to earnings can be offset with increased profits from PNC's recent retail banking acquisition. PNC purchased the retail operations of the Royal Bank of Canada for $3.45 billion in 2011, including branches in Florida, North Carolina, and Alabama. The retail banking market in the Southeastern US is highly competitive, and success is all but guaranteed. PNC is entering a market already dominated by local banks such as BB&T, Regions Financial, and SunTrust. In addition, money center banks such as Bank of America, Citigroup, and JPMorgan Chase maintain a significant presence.

Let's dive in further and consider PNC Financial's net interest margin. Banks earn a profit based on the aggregate difference of income from the loan portfolio minus deposit costs. In simplified terms, one could make an analogy to a traditional retailer, where gross profit is determined by the difference in sales revenue and cost of goods sold.

There are two components of this equation, loans and deposits. Let's consider the second component, or the amount of interest that PNC pays to creditors through certificates of deposit and savings accounts. Interest-bearing deposit costs increased by 5 basis points quarter-over-quarter to 0.29% as of September 2012, compared to 0.24% as of June 2012. While this is a marginal increase, deposit costs at PNC have nowhere to go but higher in the future.

More significant is the first component of the equation. Core loan yields declined approximately 0.31% during the first nine months of 2012 at PNC, compared to an industry average decline of only 0.24%. Loans are being repriced lower within residential real estate, commercial lending, and equipment leasing in the Midwest.

In short, the combination of a lower L value and a higher D value in the L- D = NIM formula will lead to compression within the net interest margin at PNC Financial. The bank could still manage to perform well with a lower NIM, however loan volumes would need to increase materially. Despite a moderate pick-up in commercial loan growth, many small- and medium-size business owners had been counting on a higher level of certainty in Washington D.C. to pursue investment and hiring decisions.

Finally, consensus analyst estimates for PNC have decreased over the past three months, not only for 2012, but fiscal years 2013 and 2014 as well. PNC also underperformed the KBW Regional Banking Index during 2012 by more than 10%. ETF investors may choose to invest in the SPDR KBW Regional Banking ETF (NYSEMKT: KRE) which offers exposure to 78 regional banks across our nation.

While a lower NIM may affect the industry as a whole, readers should recognize that certain regional banks are better operators than others. Consider the case of US Bancorp (NYSE: USB). The Minneapolis, Minnesota headquartered company has an established history of performing better than its peers within a difficult business environment. U.S. Bank posted a 16.5% return on equity during the last 12 months, compared to an industry average of 9.8% and below-average return of 7.2% at PNC Financial. CEO Richard Davis recently stated at the Goldman Sachs Financial Services Conference that he sees a very, very difficult environment for banks in 2013. Even with market pressures weighing on the entire sector, I still expect U.S. Bank to continue its relative outperformance this year.

For Midwest readers disappointed with my lukewarm outlook on PNC Financial, I suggest you consider the Cleveland, OH based KeyCorp (NYSE: KEY) which serves as a rival to both PNC and U.S. Bank in numerous retail markets. KeyCorp is actually expected to see sequential improvement in NIM during the fourth quarter as it improves its deposit mix. In addition, Key has reported 10% annualized loan growth during 2012, maintains a strong commercial middle market business, and is executing well on its cost-cutting program. KeyCorp management is also expected to provide an update on the bank's capital distribution strategy during the first quarter of 2013.

Foolish Bottom Line

While I might have a more positive bias on PNC in isolation, viewing the bank in the context of the industry as a whole causes me to moderate my view. The stock is attractive on a relative valuation basis for a reason. In contrast to Barron’s, I expect a flat year-over-year performance for PNC Financial and do not anticipate the company will outperform the S&P 500 during 2013.

PNC Financial will issue financial results for fourth quarter and full year 2012 on Thursday, January 17.

Thanks for reading, and consider subscribing to my posts for more Fool ideas on outperforming the market. Requests for future articles may be submitted to fool@johnmacris.com.