2 Bank Stock Picks from Atlantic Equities

Tickers in this article: BLK PNC USB WFC

NEW YORK (TheStreet) -- Atlantic Equities analyst Richard State on Thursday said that PNC Financial Services Group was his "preferred pick" among U.S. retail banks.

State compared the Pittsburgh lender with Wells Fargo and U.S. Bancorp of Minneapolis, saying that all three "are generating a high return on tangible equity putting them in a strong position to maintain a high payout ratio," but that "PNC is the bank that has the greatest potential to reduce costs and raise profitability above current expectations."

All three banks "have a history of high payout ratios with 80% to 90% being typical from 2002 to 2007," according to Staite, who said that "a bank that generates an 18% ROTE and which is growing the balance sheet at 5% per year is able to payout over 70% of earnings with no deterioration in capital ratios," and that although banks are currently limited to paying dividends of up to 30% of earnings, "we believe this could increase nearer 40% over the long term once bank meet and exceed their fully Basel III requirements."

PNC

PNC's shares closed at $62.16 Wednesday, returning 10% year-to-date, following a 3% decline during 2011. The shares trade for nine times the consensus 2013 earnings estimate of $6.82 a share, among analyst polled by Thomson Reuters.

Based on a 40-cent quarterly payout, PNC's shares have a dividend yield of 2.57%.

PNC's operating returns on average equity (ROE) over the past five quarters have ranged between 5.44% and 10.62%, according to Thomson Reuters Bank Insight. Staite estimates that in 2013, the company's return on tangible equity will be 14.6%, and that excluding the company's 22% stake in BlackRock , 2013 EPS will be is $6.50.

Staite rates PNC "Overweight," with a $76 price target, saying the shares are "cheap," at 1.3 times tangible book value, compared to a price-to-tangible-book ratio of 2.6 for U.S. Bancorp, "even accounting for differences in business mix and profitability. The analyst's price target "implies a P/TB of 1.6x and is composed of $63/share for the core banking business plus $13 for the 22% stake in BlackRock." While PNC's "valuation has been dented" by its mortgage putback charges in the second quarter, Staite said "we think it will recover."

The analyst expects PNC's dividend yield to increase to 3.4% in 2013.

Staite highlighted "that PNC is operating below potential with a cost efficiency ratio of 63% for the core banking business compared to 55% at USB and WFC," and said "we see no reason why PNC cannot close this gap over time which could give a further 20% boost to earnings."

The efficiency ratio is essentially the number of pennies of overhead expenses incurred for every dollar of a bank's revenue.

Interested in more on PNC Financial Services Group? See TheStreet Ratings' report card for this stock.

Wells Fargo

Wells Fargo's shares closed at $34.18 Wednesday, returning 27% year-to-date, following a 10% decline during 2011. The shares trade for nine times the consensus 2013 EPS estimate of $3.67.

Based on a 22-cent quarterly payout, the shares have a dividend yield of 2.57%.

The company's operating returns on average equity (ROE) over the past five quarters have ranged between 11.51% and 12.37%. Staite estimates that in 2013, Wells Fargo will achieve a return on tangible equity of 16.7% and earn $3.79 a share, with its dividend yield increasing to 3.4%.

The analyst rates Wells Fargo "Overweight," with a $40 price target, and said the shares were "attractively valued on a P/TB of 1.6x," and that the price-to-tangible-book ratio could move up to 1.8.

Staite said that Wells Fargo's return on tangible equity "is currently running at 16% and should remain at this level with potentially weaker mortgages revenues in 2013 being offset by cost savings," but that "medium to longer term we think 18% is attainable."

Please see TheStreet's earnings coverage for details on Wells Fargo's second-quarter performance.

Interested in more on Wells Fargo? See TheStreet Ratings' report card for this stock.

U.S. Bancorp

Shares of U.S. Bancorp closed at $32.90 Wednesday, returning 24% year-to-date, following a 2% return during 2011. The shares trade for 11 times the consensus 2013 EPS estimate of $3.04.

Based on a quarterly payout of 19.5 cents, the shares have a dividend yield of 2.37%.

USB's operating returns on average equity (ROE) over the past five quarters have ranged between 14.65% and 16.44%. Staite estimates that in 2013, the company's return on tangible will be 22.5%, with EPS of $3.02, and a dividend yield increasing to 2.5%.

Staite has a neutral rating on U.S. Bancorp, with a $32 price target, valuing "the core banking business on 2.1x P/TB and a 10x PE to give a value of $23/share," and then adding "$9/share for the highly profitable Payment Services business which we value on 5x P/TB or a 12.6x PE."

The analyst said that "USB is currently very well run and highly profitable but we expect return on tangible equity to slip in 2013 to 22% from 24% in 2012 as the bank may struggle to offset an expected decline in mortgage revenues with cost savings."

The company's success has been "driven by a low cost efficiency ratio of only 55% plus a relatively high leverage ratio of 16x," Staite said.

Interested in more on U.S. Bancorp? See TheStreet Ratings' report card for this stock.

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-- Written by Philip van Doorn in Jupiter, Fla.

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Tickers in this article: BLK PNC USB WFC