This Bank is a Good Investment in the Long Run
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Since the beginning of the year, PNC Financial Services (NYSE: PNC) has had quite an outstanding performance, rising by around 30.20%, beating the S&P 500’s return of only 14.42%. Famous investors, including Richard Pzena, Brian Rogers and Mario Gabelli, have added more PNC shares to their portfolios in the first quarter of 2013. Is PNC still a sweet pick for us now? Let’s take a closer look.
Manage to grow even during the crisis
PNC offers diversified financial services, including retail banking, corporate and institutional banking, and residential mortgage and asset management, serving several main markets such as Pennsylvania, New Jersey, Illinois, North Carolina and Florida. Indeed, PNC had quite a powerful franchise across the U.S., with its footprint covering nearly 50% of the U.S. population. It ranked seventh in the U.S. in terms of deposits ($213 billion), and fifth in terms of branches (2,881), and ATMs (7,282).
From 2008-2010 PNC managed to increase its tangible book value per share by as much as 40%, higher than the tangible book value growth of Wells Fargo (NYSE: WFC) at 25% and JP Morgan Chase (NYSE: JPM) at 22% during the same period. PNC also experienced the highest growth in its tangible book value in the period of 2009-2012. While its tangible book value per share increased by 97%, the tangible book value per share of Wells Fargo and JP Morgan rose by only 66% and 42%, respectively, in the past four years. In the first quarter of 2013, its loan loss reserves, including purchased impaired loans, was 2.45%, lower than JP Morgan’s loan loss reserves of 2.85% but higher than Wells Fargo loan loss reserve of 1.97%.
Concentrating on commercial lending
The majority of the company’s deposits, around $65.93 billion, were money market deposits. The demand deposits ranked second, with $34.34 billion while the retail certificates of deposits came the third with more than $26.6 billion. In 2012, its net interest income was $9.78 billion, with the net interest margin of 3.94%. What I like about PNC is its heavy lending in the commercial areas, including retail, manufacturing, healthcare, financial services, etc. The commercial loans were $83 billion, or 44.7% of the total loans. Home Equity was the second biggest loan category, with $35.92 billion in loans, while residential real estate and commercial real estate came in at only $15.24 billion and $18.65 billion, respectively.
Highest earnings valuation among its much bigger peers
PNC is trading at $75.90 per share, with a market cap of $40.20 billion. The market values PNC at around 11 times its forward earnings and 1.08 times its book value. Compared to JP Morgan and Wells Fargo, PNC has the highest earnings valuation. JP Morgan is trading at $54 per share, with a market cap of $204.60 billion. The market values JP Morgan cheaper, at 9.04 times its forward earnings and 1.04 times its book value. JP Morgan has the global leading position in Consumer & Business Banking, Mortgage Banking and Card, Merchant Services & Auto. The company reported that it was the #1 in ATM network and #2 in branches. It also holds the #2 spot in mortgage origination and is the biggest credit card issuer in the U.S. In the first quarter 2013, its net interest margin stayed at 2.37%. JP Morgan’s capital plan had been approved by the Fed to buy back as much as $6 billion in shares through the first quarter of next year, yielding as much as 2.93% for its shareholders. Moreover, JP Morgan also announced that it would raise its quarterly dividend from $0.30 per share to $0.38 per share, pushing the annualized dividend to $1.52 per share. The dividend yield is 2.8% at its current trading price.
Wells Fargo, the biggest among the three, is trading at $42.40 per share, with a total market cap of more than $224.40 billion. The market values Wells Fargo at 10.76 times its forward earnings and 1.5 times its book value. Wells Fargo reported that it had more than 70 million customers in around 9,096 stores, including retail banking, wholesale banking, Wells Fargo Advisors and Mortgage banking. It was considered the number 1 small business lender and auto lender, #1 in mortgage origination in both residential mortgage and commercial mortgage. What might make investors excited is its consistent growth in quarterly EPS, from $0.45 per share in the first quarter 2010 to $0.92 in the first quarter 2013. Its net interest margin came in at 3.48% in Q1 2013. Looking forward, Wells Fargo is expected to have the return on assets of 1.3% to $1.6% and a return on equity of 12%-15%, while the total payout ratio was estimated to stay in the range of 50% to 65%. The bank also increased its cash return to its shareholders by increasing its quarterly dividend to $0.30 per share. Thus, the dividend yield is 2.83%. It also announced that it would buy back a higher amount of shares compared to 2012.
My Foolish take
PNC seems to be a good banking stock to hold in the long run due to its conservative lending practices with commercial lending focus. Moreover, PNC has managed to grow its book value at a good rate even in the crisis period or the “new normal” period. We could expect this trend would continue in the future, delivering the recent return to its shareholders. Investors could also enjoy a sweet dividend yield at 2.3% at its current trading price.
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Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of JPMorgan Chase & Co., PNC Financial Services, and 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!