PNC Financial: A Strong, Under-the-Radar Bank Headed In the Right Direction

PNC Financial's focus on its deposit, lending and asset management business has yielded great results for shareholder over the last two years. In 2011, PNC Financial's tangible book value stood at just $44.38 and has now increased to $56.33 in the first quarter of 2014 driven by higher earnings from its asset management and residential mortgage business.

PNC Financial did a great job at compounding book value and the stock now trades at a 55% premium to tangible book value. With about $17 per share in intangible assets, though, PNC Financial trades at just an 18% premium to total book value.

With increasing book values, improving asset quality and record earnings in 2013, PNC Financial is clearly an interesting regional bank alternative to other high-profile banks in the financial sector.

PNC Financial flies under the radar
Many Wall Street institutions and fund managers solely concentrate on high-profile banking institutions such as Bank of America, Citigroup and Wells Fargo when they want to gain financial services exposure. Large-cap banking institutions like the ones mentioned above do not only have a larger domestic branch network, but also international exposure to strategic growth markets, for instance, in Asia and Latin America.

However, investors neglect the second league of financial institutions which actually make quite attractive value propositions, too.

The financial crisis is still fresh in investors' minds and banking firms are not on the preferred shopping list of U.S. investors yet. That, however, could be a big mistake.

Since the U.S. economy is still not growing as strongly as it could, bank earnings have substantial room to grow. Broadly positioned banking institutions like PNC Financial are set to reap the rewards that come with stronger economic growth and rebounding demand for commercial banking, mortgage lending as well as asset management services.

While large-cap banks like Bank of America and Citigroup are constantly in the headlines because of settlement and litigation issues, PNC Financial takes on a low-profile role, but is nonetheless strongly growing its core business.

Solid business fundamentals
From 2011 to 2013, PNC Financial's grew revenues increased from $15.8 billion to $16.9 billion: A solid plus of 7% in an arguably difficult banking environment.

Over the same time, PNC Financial's net income skyrocketed by an even higher growth rate of 38% from $3.1 billion to $4.2 billion. Better commercial lending performance and tight cost controls have led to record earnings in 2013, a year in which other banks still struggled with litigation expenses and settlements.

Another theme worth mentioning is PNC Financial's improving underlying asset quality. Despite a short-lived spike in non-performing loans and net charge-offs in the first quarter of 2013, the trend clearly indicates that PNC Financial's asset quality is rapidly improving (see chart below). Troubled loans and net charge-offs have materially improved since the fourth quarter of last year.

(Source: PNC Financial Fourth Quarter and Full Year 2013 Results Presentation)

Final assessment
Since PNC Financial has a convincing record of increasing earnings and book value, the premium multiples do not seem to be out of touch with the underlying fundamentals. Second league banks like PNC Financial should benefit handsomely from an improving U.S. economy and stronger growth in the years ahead.