4 Large Regional Banks To Follow Closely

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I have long had a fondness for PNC Financial (NYSE: PNC), now the nation's sixth largest bank by assets. It never had a losing year in the recession, and instead of retreating as many a bank has since late last decade, it instead has grown, largely through acquisitions. PNC's stock price has languished through 2012, as it was essentially flat in a year where banking and financial ETF's were up on the order of 15% to 25% in the year. But things are unlikely to remain this way in 2013, and toward that end Barron's recently posted a glowing review of PNC's prospects.

There are issues to be sure, primarily related to PNC's 2012 purchase of Royal Bank (NYSE: RY) American retail network. That purchase was made for below book value, and as the old loans formerly on Royal Bank's books gained value, PNC was able to mark up the overall value of those loans by $1.05 billion in 2012. It is that “purchase accounting accretion" that allowed PNC to post a net interest margin in the third quarter of 2012 of a well above average 3.82%; were it not for those mark to market adjustments, PNC's net interest margin would have been a far more pedestrian 3.43%. PNC will at best receive half that amount as gains in 2013, placing pressure on the company's net interest margin even before the first day of the year.

The anchor on the company for the past two years has been agency clawbacks due to substandard mortgages, many written by companies acquired by PNC, in the middle part of last decade. PNC spent over $1 billion in 2012 on those soured mortgages, but now, management believes it has reserved fully for any additional claims.

For all the headwinds, PNC has a virtually unparalleled ace on its balance sheet. It holds over $7 billion of common stock in BlackRock (BLK). While this amount does not show up fully under Basel III capitalization requirements, it is a highly liquid, dividend ($200 million per year) paying asset.  PNC even has a heart, enough so that it suspended in early December all eviction actions on occupied homes it has foreclosed until early January.

Looking ahead, the impact of both reduced expenses and increased revenues from the Royal Bank purchase will undoubtedly be a huge lift to 2013 earnings. Earnings, that in 2012 will be within a few cents per share of 2011, are expected to jump around 20% in 2013 from 2012 levels. Given that PNC is trading at just 10 times 2012 earnings, it follows that there should be a jump in stock price next year, and most analysts are pegging the stock price at about $70 per share within the next year to 18 months, for a gain of 19%. Along with the 2.7% yield, PNC makes a compelling opportunity at today's sub $60 per share level. 

Regions Financial (NYSE: RF) looks interesting as it made it through its most difficult days, and with better days ahead, the stock should follow. But those dark days of late last decade are not over with yet. The Wall Street Journal reports that Regions is being investigated by federal examiners, the SEC, and others, for allegedly improperly accounting for non-accrual loans. I am not concerned, for the company has gone through a thorough management shakeup over the past three years and received numerous credit upgrades. I doubt the current investigations will yield anything substantial, and still look for Regions to up its dividend and launch a modest share buyback in the second quarter of 2013, after the Federal Reserve examines Regions' “stress test.” 

Wells Fargo (NYSE: WFC) recently got some welcome news. After being downgraded by Barron's and others, it is being sent back to a trial court in San Francisco on charges that the retail banking giant violated California law regarding excessive overdraft fees. The appellate court ruled that Federal Banking laws preempt state laws, so the trial court's $203 million judgment against the bank was being vacated.

At the early December Goldman Sachs U.S. Financial Services Conference, CEO John Stumpf gave the same, sunny view of his bank that has been the leading performer among the country's $1 trillion asset level banks. With retail “stores”, mortgage offices, or investment advisory offices in every state in the country, Wells Fargo is able to balance out regional economic slumps. It is the nation's leading residential and commercial mortgage originator and servicer. It is also growing. From the end of the third quarter of 2011 to the same period of 2012, its earning assets increased by 6%, and its outstanding loans grew by 3%, despite Wells Fargo's efforts to trim the outstanding loans acquired in its mammoth acquisition of Wachovia. About the only criticism of Wells Fargo is how can it possibly become even more profitable?

I don't believe Warren Buffett and Berkshire Hathaway (BRK-A) would have acquired more Wells Fargo stock this year if they shared the concerns of other analysts. I fully expect Wells Fargo stock to outperform the banking sector as a whole over the next several years.

Perhaps my favorite large, regional bank to watch over the next year or two will be M&T Bank (NYSE: MTB). M&T had long been a top tier performing bank, with well controlled expenses and fewer credit issues than most of its peers. But with its recent purchase of Hudson City Bancorp (HCBK) growth will pick up. M&T will pick up nearly $30 billion of mostly high quality real estate loans in the transaction. The deal will also assist the efficiency of M&T's marketing, given the population density in the new markets M&T will gain. I see earnings for the combined company rising 12 to 15% both this year and next, and on that basis, M&T is currently undervalued. Its 2.8% yield is near the top of the banking. 


StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of PNC Financial Services. 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!

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