As a result of the financial crisis and the aid it received from the government, warrants on PNC Financial (PNC) common stock were created and later sold to the public. Here's an introduction to warrants if you are not familiar with them. The PNC warrants expire December 31, 2018, providing a leveraged way to gain exposure to the company until then. The strike price is $67.33, which is below the current share price, so the volatility of these warrants will be lower than warrants in other companies that are out-of-the-money. The prospectus is available for those who want to do further research. The warrants trade under a variety of symbols, depending upon the brokerage service used (PNC.WS, PNC/WS, PNC-WT, etc).
The warrant strike price is roughly 8% below the current stock price. As a result, a significant portion of the warrant price now is time value, not intrinsic value. These warrants will see relatively wide swings in price as a result. The 52 week range of the warrants is $7.25 to $18.61 (a 61% drop to the low from the high), a large swing compared to the PNC stock, which has a 52 week range of $53.61 to $77.93 (a 34% drop to the low from the high). As a result, this instrument is only for investors who want leveraged exposure to PNC stock price increases till 2018 and can tolerate the wide volatility swings. The warrants began trading in April 2010 for $19.20 per share when PNC common stock was trading at $65. The warrants have fallen 17% since then. Over that same time, PNC share price is up roughly 12%.
The table below lays out specifics of the PNC warrant relative to the stock price.
Current PNC Stock Price
Current Warrant Price
Warrant Expiration Date
December 31, 2018
Warrant Strike Price
Time Till Expiration (years)
Premium Time Value per Year ($)
Total Stock Price Increase Required for Break Even ($)
Total Stock Price Increase Required for Break Even (%)
Stock CAGR Required for Break-even
For the warrants to break even at expiration, PNC's stock must increase 13% or roughly 2.4% per year. This level of stock appreciation is not out-of-the-question for the stock.
The major drag on banks over the past few years has been the continued decrease in net interest margin. The chart below compares PNC's NIM to the average for all large US banks - from FRED.
PNC's net interest margin has been continually above the average for large US banks. As interest rates rise, this better-than-average margin should also begin to increase. Initially though, the company has warned that the rise in interest rates will have a meaningful negative impact on their earnings due to a drop in the mortgage business.
PNC is a one of the better-run mid-size banks - as illustrated by its NIM that is constantly higher than the industry average. Despite this steady performance, the stock still trades at 0.87 times book value - which is below the average for large cap banks of 1x book value. The stock also trades at a PE ratio of 11.5 which is below the industry average of 12.7.
In April 2013, the company raised its dividend 10% to $0.44 per share per quarter - a 2.4% yield at the current stock price. In the Q2 conference call, the company said it is well positioned to return more capital to shareholders in 2014 - so shareholders should expect another dividend increase in 2014. In the recent Barclay's conference it participated in, it also mentioned that it would like to deploy some of its excess capital as a share buyback.
Given the current dividend and the level of the adjustment threshold in these warrants, there will probably need to be several more dividend increases until the dividend rises above the adjustment threshold, triggering warrant adjustments. It is reasonable that the warrants could be adjusted closer to the end of their life. The adjustment mechanism for the warrants is relatively complicated, so here's a link to an article that illustrates the adjustments into the two parts - strike price reduction and warrant shares adjustment.
The warrants that trade on PNC provide leverage to investors who are bullish on the future prospects of PNC Financial. With this leverage, there are much more significant price swings - which should dissuade conservative investors. The company is undervalued in relation to other mid and large-cap banks and is in a position to increase capital return to shareholders over coming years.