PNC Financial Services (PNC) Might Have 20% Upside

At the 2013 Barron’s Roundtable, Brian Rogers, chairman and chief investment officer of T. Rowe Price, recommended two of his favorite stocks. One was PNC Financial Services (NYSE:PNC), a financial services company. The other was Avon Products, Inc. (NYSE:AVP), the direct selling company with beauty and fashion-related products. In this article, I will focus on PNC to see whether or not investors should buy this company at its current price.

A Growing and Profitable Financial Services Company

PNC, incorporated in 1983, is considered one of the biggest diversified financial services in the US, with four main business segments: retail banking, corporate banking, asset management services, and residential mortgage. In the full year 2012, PNC had $9.64 billion in net interest income, whereas the noninterest income was nearly $5.88 billion. The net income came in at $3 billion, or $5.30 per share.

In the past three years, PNC has experienced a growing number of customers in all four segments. In the retail banking segment, the new consumer and small business accounts, exclusive of accounts acquired via acquisitions, totaled 254,000. In 2012, the number of new clients in the corporate banking segment and asset management were more than 1,000 and 2,117, respectively. In the residential mortgage segment, total loan originations have reached $15.2 billion, a 33% increase compared to 2011.

The core operating performance could be measured by the growth in net interest income and net interest margin. In 2012, PNC’s core net interest income increased 12% due to the organic loan growth, lower funding costs, and Southeast expansion. In the past 5 years, PNC’s net interest margin has fluctuated in the range of 3% – 4.14%. In 2012, its net interest margin stayed at 3.94%.

Compared to its much bigger peers including Bank of America Corp (NYSE:BAC) and JPMorgan Chase & Co. (NYSE:JPM), PNC had the highest net interest margin among the three. In 2012, the net interest margins of Bank of America and JP Morgan were 2.35% and 2.40%, respectively.

PNC is Worth $70 – $75 per Share

Brian Rogers commented that PNC had been up only around 4% last year while other financial stocks were rising significantly. It might be due to its recent purchase of Royal Bank of Canada (USA) (NYSE:RY)’s operations in the Southeastern US. Rogers said that he liked to look back to 2008 and 2009 to see how banks had performed through that crisis period. PNC was still quite profitable in those two years. In 2008, PNC’s EPS was $2.10, and it jumped to $4.46 in 2009.