There has been much discussion surrounding the TARP warrants issued by the largest banks, and for good reason: They provide investors with an opportunity for long-term leverage on large companies. But while some warrants have got a lot of attention, others haven't seen as much of the spotlight, and it's important to consider them as well when making investment decisions.
PNC Financial Services Group (NYSE:PNC) casts a wide net over the financial system. The bank involves itself in the retail, corporate, and investment sides of banking while maintaining a large geographic presence across much of the eastern United States. Shares of PNC were hurt during the meltdown, as many other banks were, but they were fairly quick to rebound and now trade near pre-recession levels.
But while PNC shares are back, there are still major opportunities for the housing and financial markets to come back. With shares trading at under 11 times earnings and only 1.3 times tangible book, PNC isn't too expensive now and looks to be in a prime position to benefit from a greater recovery in both consumer and corporate banking.
Like many financial institutions, PNC issued long-dated PNC warrants (NYSE:PNC-) to the Treasury in connection with the bailout package administered under TARP. And like many other banks, PNC didn't repurchase the warrants from the Treasury, and they were in turn listed on the NYSE.
The warrants grant the holder the right to acquire one share of PNC at $67.33 until Dec. 31, 2018, and currently trade at around $16.00 each. Based on PNC's share price at the close on Oct. 11, 2013, these warrants provide leverage of around 4.5 times on PNC.
The PNC warrants are in a unique position when compared with the other TARP warrants. The Wells Fargo warrants (NYSE:WFC-) and JPMorgan Chase warrants (NYSE:JPM-) are well in-the-money, with shares trading 22% and 24% above the warrant strike prices, respectively. As a result, investors in these in-the-money warrants can only get around three times leverage. While I still like the warrants from Wells Fargo and JPMorgan, investors with a more bullish outlook on the industry may want to choose the higher leverage offered by the PNC warrants, even though they're in-the-money by only around 8%.
While many banks sold off assets to repay government assistance, PNC made a major acquisition in 2011. The bank acquired Royal Bank of Canada's U.S. retail operations for $3.45 billion in a deal that significantly added to PNC's southeastern U.S. presence. This gives PNC the potential to become a greater player in a fully recovered financial system than it was before the recession. For PNC, this means greater reach and more potential upside for a rebound in retail banking.
Although the warrants of the largest banks have captured the most attention, warrants offered by smaller institutions shouldn't be overlooked. PNC warrants offer a way for investors to get 4.5 times leverage using an in-the-money warrant on a bank with major rebound and growth potential.
Diversification across multiple banking divisions helps to lessen risk at the bank while allowing it to participate in a broader financial recovery. Investors looking to add some leverage in the financial sector to their portfolios should have a look at PNC and its warrants.
Alexander MacLennan has no position in any stocks mentioned. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool owns shares of PNC Financial Services. 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.