PNC Financial Services: Facing the Heat

To begin with, I would like to remind all that I am a private investor - not an analyst, nor a reporter or media professional. Hence, expect me to be short anything that I am bearish on and long on anything that I am bullish on. Very strong investment results are my goals, with the blog being a hobby.

With that being said, I am bearish on the regional banking sector with large concentrations of commercial real estate, consumer finance and 2nd lien residential real estate risk. I screened about 330 S&Ls, regional and small/mid-cap banks and the finalist of this contest was PNC (PNC). Below is my (textual) take on PNC. Later, I will post some other banks that I have looked at along with additional info on the state of the industry that emboldens me to hold short positions during this bear rally. I will also be posting updates on the homebuilders.

The banking and financial services sector in the US and across the globe continues to be under the ambit of unrelenting financial market disturbances. With banks and financial services companies continuing to report large charge-offs on loans and mark-to-market losses, no near-term prospect of an inflection point of the current financial markets turbulence is in sight. The recent macro-economic indicators in the United States have also not exhibited any signs of a turnaround from the gloomy state of affairs prevailing since mid-2007.

Amid these deteriorating economic conditions, Pennsylvania-based PNC Financial Services has started to face the heat in the form of rising losses from mark-to-market write-downs and loan delinquencies.

We believe that more problems could be in store for PNC considering that a significant 54.2% of its total loans of the bank comprise real estate loans and a significant 20.4% of the total assets are invested in held-for-sale securities.

PNC's lower-than-peer capital ratios and historically low provisioning for loan losses may prove to be a serious concern with an expected increase in provisions and resulting charge-offs, together with mark-to-market losses on held-for-sale securities.

This, coupled with lower loan growth and an expected decline in fee-based income, would drive PNC's adjusted EPS and BVPS to an estimated $1.84 and $40.03, respectively, in 2008, and $1.96 and $38.47 in 2009, versus $3.94 and $44.34 in 2007.

On the upside, we believe that the bank's diversified income stream relative to its peers and its investment in BlackRock (BLK), a leading asset management company, underpin PNC's earnings ability in the troubled market conditions.

[For the full 22 page forensic report in html or downloadable pdf, visit my blog.]

Disclosure: Author has a short position in PNC

Comments

[fatcat:]

Reggie,I completely agree with your assesment,been short kre for months and short other financials. All in all, I've had my ass handed to me.There are so many unsound fundamentals in this space that short would seem to be gimmy,but its hard to figure out how much fed prop effect is going on..

2008 May 16 07:16 AM

[VP of Commo...:]

I was browsing their balance sheets and noticed a high amount of intangible assets ($9.55B) relative to total asset value ($14.5B). I can only guess that intagible assets are not very useful as collateral. Either way the -intangible leverage is about 23:1.

With NPL's at 0.77%, up moderately from 0.64 in 2007Q4, and an EPS of $1.09 I don't see a problem here. Frankly they would would like a long play to me if the share price wasn't so high.

What scared me more that that was doing the same comparison for ETFC. If you back out intangibles their leverage is about 154:1.

I bring this up because BSC and TMA were leveraged around 33:1 irrelevent of intangibles when the proverbial shit hit the fan.

2008 May 17 03:04 PM

[VP of Commo...:]

I thought about the ETFC comparison some more and realized that I had oversimplifed. Evaluated as a bank ETFC looks terrible, but they have the brokerage business as well. It's two companies in one, and the brokerage is almost as good as the bank side is bad.

2008 May 18 09:04 AM

[dax:]

ETFC B/D biz has benefited the same way as oil ,wheat and other commodities, the flood of "retail", ETF, and other mass market investments surrounding a limited supply of commodity....while RE, stock market and bonds suffer- these groups have been artificially propped up... ETFC will not survive because their customer base has a very shalow pocketbook, and that is getting tapped right now.

2008 May 20 03:00 PM

[User 229574:]

Mercantile was a conservative, "safe" and highly rated bank. PNC completed their takeover of Mercantile in late 2007. PNC's investments are heavily skewed towards commercial real estate and real estate loans. As a simple investor with PNC (Checking and other accounts) I was wondering whether an assessment of MD based banks exists that would provide a truly useful comparison for investors looking for the safest haven. Comments or suggestions of a particular bank would be welcome. Thanks

2008 Jul 21 11:36 AM