PNC To Take Hit for Fannie/Freddie Holdings

I'm making a list and checking it twice (ok about 98 times) of financial names to consider for the coming boom in consumerism coming "in 6 months". We've stated our relative affinity (remember it's all relative) for Wells Fargo (WFC), US Bancorp (USB) and JP Morgan (JPM) [Jul 16: Wells Fargo Impresses Me]

Two regional banks have done well all things considering, BB&T (BBT) and PNC Financial Services (PNC). PNC especially interests me because frankly these banks are valued on black box balance sheets which forensic accountants have a tough time figuring out so I like the market to tell me who is doing well. The market being the charts. PNC has an amazing chart for a financial, a 52 week high was just reached in fact.


It is basically a regional bank based out of Pittsburgh, PA

The PNC Financial Services Group, Inc. operates as a diversified financial services company in the United States. It offers retail banking, corporate and institutional banking, asset management, and global fund processing services.

So this is one name we have on the radar to add to our "valuations don't matter, the economy will recover and you must own financials even though 2009 is not going to be a pretty year". I'm also more interested in Wells Fargo (WFC) due to its mortgage business if the government keeps its promise (which I doubt) to shrink the portfolios of Fannie/Freddie since that leaves a very good business for Wells Fargo and Countrywide (inside of Bank of America). So those are all things to think through. The problem is you need to weight the near term weakness over the coming 6-18 months versus the potential in 2010+. So timing these things is problematic. The other debate is whether to buy 'worst of breed' for the higher risk/reward or go with one of the stalwarts which bring less risk but the stocks have not been decimated.

Anyhow I want to point out PNC Financial for a news item that crossed last night - for both the 1x hits due to holdings in Fannie/Freddie and the continued degradation of the commercial loan business. If the "best of breed" banks are taking these type of hits, we can see what lies ahead for the less conservative names. Despite last quarter (or was it the quarter before that? or the one before that?) being the kitchen sink quarter.

• Regional bank PNC Financial Services Group Inc. on Tuesday disclosed it expects to take an array of charges in the third quarter tied to its ownership of Fannie Mae and Freddie Mac preferred shares, its stake in BlackRock Inc. and continued weakness in the credit markets, according to a regulatory filing.
• PNC said it owns $80 million in Fannie and Freddie preferred stock. With the government announcing it is taking over the embattled mortgage giants, PNC expects to record a "significant" impairment charge tied to the ownership of those shares, according to a filling PNC made with the Securities and Exchange Commission.
• The size of the exact charge was not disclosed. It is widely expected many banks will have to write off a large portion or all of their investments in Fannie and Freddie preferred shares. The government said it will cease making any dividend payments on the preferred shares and the government will be repaid for its investments before preferred shareholders.
• PNC said as of the end of August, it was also in line to take an additional $120 million in charges to reduce the value of certain commercial mortgages held for sale. The value of mortgages has plummeted since the middle of 2007 because of rising defaults.

Now $120M is "peanuts" in the big picture but again this is one of the "conservative" banks.

Disclosure: Long Blackrock in fund; no personal position.

Comments

[ptolaw:]

In addition, PNC disclosed in it's K-8 of September 9, further exposure to claims of financial irregularties and litigation costs therefrom related to its vast interests in newely aquried Sterling Bank Corp. Moreover, PNC (truly a black box) within the pasts few years had similar claims of accounting fraud and actual charges brought against senior managers within its organzation. PNC paid significant fines. Furthermore, within the pasts month or so, since its Cramer (show)outing and subsequent unjustified metoric rise from its July 15th low, numerous directors have been routinely exercising their stock options and SELLING. Not a sign of confidence. PNC is a 50 dollar stock at best.

2008 Sep 10 11:32 PM

[ptolaw:]

I agree!! Just another Cramer hype job. PNC has big time exposure to commercial real estate, which is the next shoe to drop. Its overpriced and should be downgraded.

2008 Sep 11 12:03 PM

[Jake Rifkin:]

Only a few banks will survive this havoc, it is obvious PNC will be one of them.
The stock value is sheer proof that they can manage a successful financial institute in reference to the others.

2008 Sep 30 01:10 AM