PNC: Financial Loser
By Philip van Doorn - 07/23/12 - 4:38 PM EDT
NEW YORK (TheStreet
) -- PNC Financial Services Group
was the loser among large U.S. financial names on Monday, with shares pulling back 3% to close at $57.61.
The broad indexes recovered from earlier lows to close with 1% losses, after investors pushed the yield of Spanish 10-year bonds to 7.49% at the close of trading. That was the bond's highest closing yield since the creation of the Euro. Investors were concerned
that following the agreement among eurozone officials on Friday for a bailout of as much as 100 billion euro for Spain's beleaguered banking sector, Spain itself may need to be bailed out.
The yield on 10-year U.S. Treasury paper declined by two basis points to 1.43%.
The KBW Bank Index
was down 1% to close at 44.45, with all 24 index components seeing declines, except for JPMorgan Chase
, which was up 2% to close at $34.44, and Bank of America
, which rose slightly to close at $7.09.
The nation's largest two banks are trading at very attractive historical valuations to tangible book value and earnings.
JPMorgan trades for just above tangible book value, according to Thomson Reuters Bank Insight, and for less than seven times the consensus 2013 earnings estimate of $5.21 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $4.64. Based on a quarterly payout of 30 cents, the shares have a dividend yield of 3.48%.
Among 33 sell-side analysts polled by Thomson Reuters, 22 rate JPMorgan a buy, showing confidence that the company has put the bulk of its hedge trading losses
Bank of America's shares trade for just over half their reported June 30 tangible book value of $13.22, and for eight times the consensus 2013 earnings estimate of 83 cents. The consensus 2012 EPS estimate is 56 cents.
Out of 32 analysts polled by Thomson Reuters, only nine recommend investors jump into Bank of Americas share, while 20 analysts have neutral ratings, and three analysts recommend selling the shares, even at these low valuations, as the company's mortgage putback
risk continues to increase.
PNC on Wednesday reported second-quarter earnings of $546 million, or 98 cents a share, missing the consensus estimate of $1.24, among analysts polled by Thomson Reuters.
The Pittsburgh lender's second-quarter results included previously announced mortgage putback charges of $284 million, or 54 cents, and $119 million in other charges for trust preferred redemptions and merger integration expenses related to the acquisition of RBC Bank (USA) in March.
A bright spot for PNC's second quarter was an increase of its net interest margin to 4.08% from 3.90% the previous quarter, and 3.93% a year earlier, running counter to the trend for most large regional banks in the prolonged low-rate environment.
PNC's shares have now returned 2% year-to-date, following a 27% decline during 2011.3
data by YCharts
Based on a 40-cent quarterly payout, the shares have a dividend yield of 2.788.5%.
PNC's shares trade for nine times the consensus 2013 EPS estimate of $6.79. The consensus 2012 EPS estimate is $5.73.
Stifel Nicolaus analyst Christopher Mutascio rates PNC a "Buy," with a $74 price target, and said on Wednesday after the earnings announcement that if the mortgage repurchase charges and merger expenses were excluded, "we can arrive at a quarterly EPS run rate going forward of $1.74 assuming the company has fully accounted for higher loan repurchase demands/putbacks within the 2Q12 reserve build."
Mutascio said that PNC's margin expansion, "easily exceeded our expectations of 3.87%," adding that "of the $235 million sequential quarter increase in net interest income, we estimate that one-third ($80 million) was derived from higher accretable yield and two-thirds ($155 million) was driven by core margin expansion."
Stifel Nicolaus estimates that PNC will earn $6.00 a share for all of 2012, followed by 2013 EPS of $6.90.
Mutascio said that his price target "represents 10.7x our 2013 EPS estimate of $6.90 and 1.5x our 4Q13 estimated tangible book value per share of $50.16, which we believe to be reasonable valuation metrics for a company that is generating above peer returns on average assets
JPMorgan Chase analyst Vivek Juneja rates PNC "Overweight," with a $78 price target, saying on Monday that "PNC is expanding its business through recent acquisitions of Nat City and RBC's US bank franchise and actively growing fee based businesses including capital markets and treasury management as well as consumer businesses such as credit cards.
"PNC is trading at 1.4x tangible book, in-line with overall regional banks," Juneja said, adding that "we think should be trading closer to high quality banks given its track record of good revenue growth and conservative risk profile."
Interested in more on PNC Financial Services Group? See TheStreet Ratings' report card for this stock.
Shares of SunTrust
declined 2.5% to close at $22.94. The shares pulled back for a second straight session after the company on Friday announced second-quarter net income available to common shareholders of $270 million, or 50 cents a share, beating the consensus estimate of 44 cents.
The Atlanta lender's earnings improved from $245 million, or 46 cents a share, in the second quarter, and $174 million, or 33 cents a share, in the second quarter of 2011.
The second quarter bottom line was boosted by a $48 million release of loan loss reserves, which the company said "was reflective of the continued improvement in asset quality, partially offset by growth in the loan portfolio."
SunTrust's total portfolio loans grew 2% during the second quarter, to $178.3 billion, while total non-real estate commercial and industrial loans grew 4% to $52.0 billion.
The company's net interest margin -- the spread between the average yield on loans and investments and the average cost for deposits and borrowings -- declined to 3.39% during the second quarter, from 3.49% the previous quarter, and 3.53% a year earlier, in line with most large regional banks, as short-term rates remain near zero and long-term rates continued to decline. The sequential decline in the margin took place "primarily as a result of the anticipated reduction in swap-related interest income," according to the company.
SunTrust's net interest income declined 3% sequentially, to $1.3 billion during the second quarter, "largely driven by the reduction in income derived from previously terminated interest rate swaps utilized to manage interest rate risk on commercial loans," while increasing 2% year-over-year, "primarily due to higher loan balances and favorable trends in deposit mix and pricing."
During the second quarter, noninterest income increased 7% sequentially, and 3% year-over-year, to $940 million, "due primarily to higher mortgage production income as strong production volumes continued through the quarter."
The company' second-quarter return on average assets was 0.62% and its return on average common shareholders' equity was 5.37%.
SunTrust reported a June 30 Tier 1 common equity ratio of 9.40%, increasing from 9.33% the previous quarter and 9.22% a year earlier.
The company's initial 2012 capital plan, which included an increased return of capital to investors through dividends and/or share buybacks, was only partially approved by the Federal Reserve
in March, with the regulatory agreeing to the redemption of trust preferred shares, but objecting to any increase of SunTrust's five-cent quarterly dividend, or buybacks of common shares. During SunTrust's earnings conference call, CEO Bill Rogers said that "while the Fed is in the process of reviewing" a revised capital plan, the bank had "elected not to request any increase in the current level of the dividend or any other return of capital at this time," since the revised plan "only covered capital actions for the fourth quarter of 2012 and the first quarter of 2013."
SunTrust's shares have now returned 30% year-to-date, after falling 40% decline during 2011.
The shares trade for 0.9 times their reported June 30 tangible book value of $26.02, and for nine times the consensus 2013 earnings estimate of $2.63 a share. The consensus 2012 EPS estimate is $1.96.
Guggenheim analyst Marty Mosby has a neutral rating on SunTrust, and said on Monday that the company "would need to improve its return on tangible common equity (ROTCE) above 11% in order to begin to warrant a premium to tangible book value," with a second-quarter ROTCE at "approximately 8%."
The analyst said that "in order to improve its returns by 3%, STI would need to increase annualized earnings power by about $1 per share, or by $175 million in quarterly pre-tax earnings," and that "efficiency initiatives coupled with less credit-related activities could produce $100 million while a return to more normal repurchase provisioning could add another $80 million." Mosby believes "this earnings power will eventually be realized by year-end 2013; however, it will likely take most of the next 12 months to achieve these benefits."
SunTrust is in the midst of an effort to reduce its annual expenses by $300 million, and said that at the end of the second quarter, "$250 million in annualized expenses had been eliminated from the Company's expense base through the Playbook for Profitable Growth program, compared to the $300 million goal expected to be achieved by year end 2013."
Mosby said that "the combination of these two trends could pull out more than 8% of STI's current expenses by year-end 2012, adding about $0.50 to annualized earnings per share."
Interested in more on SunTrust? See TheStreet Ratings' report card for this stock.
-- Written by Philip van Doorn in Jupiter, Fla.
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