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PNC is a 'Unique' Bank Stock Earnings Play: Analyst

Written by: Philip van Doorn 09/10/12 - 9:32 AM EDT
Tickers in this article: FITB TCB PNC CRBC I:BKX

NEW YORK (TheStreet) -- Shares of PNC Financial Services Group (PNC) have underperformed this year, but Oppenheimer analyst Terry McEvoy sees price "multiple expansion" ahead for the Pittsburgh lender.

PNC's shares closed at $63.80 Friday, returning 13% year-to-date, trailing the 25% return for the KBW Bank Index (I:BKX) , and all but four of the 24 index components.

McEvoy on Sunday upgraded PNC to an "Outperform" rating from "Perform," with a price target of $75, saying that the company's acquisition of RBC Bank (USA) in March is "an ideal platform for PNC to expand market share in the Southeast." He added that "the merits behind this deal should become more visible in 2H12 and the accretable yield "bucket" is now full with the newly acquired assets estimated to drive 10-12% net interest income growth over the coming quarters."

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PNC's expected earnings growth in 2013 stands in contrast to "a growing list of banks is now expected to report negative YoY growth in 2013 earnings," and "the solid revenue visibility, internal capital generation and attractive valuation outweigh any lingering risk connected to higher mortgage repurchase demands," according to McEvoy.

The year-to-date underperformance in part reflects investors' concerns over increased mortgage repurchase demands, with PNC reporting a second-quarter mortgage putback provision of $438 million, feeding an earnings miss, and McEvoy said that "another $350M could be recorded," while pointing out that a charge of that magnitude would be only "a ~10bps hit to capital."

A major silver lining for PNC during the second quarter was that the company's net interest margin -- the spread between the average yield on loans and investments and the average cost for deposits and borrowings -- expanded to 4.08%, from 3.90% the previous quarter, and 3.93% a year earlier. Most large regional banks have seen continual margin pressure, as the Federal Reserve has continued buying long-term securities in an effort to push long-term rates down.