All right I think PNC is still undervalued by 40% or so. A quick way to value banks is take their Return on tangible equity .PNC's I calculate in 2014 will be 15%. (I exclude core deposit amortization of $200M) and going forward I calculate PNC"s ROTE will be around 17%.
Return on tangible equity is net income / beginning tangible equity. I use beginning equity since it plugs into my model better. Average is technically more precise but beginning works perfectly.
Anyways here is my quick formula.
Take tangible equity so PNC 28 billion
Multiiply that by (Return on tangible equity / discount rate) So PNC average about 16. I calculate their discount rate to be around 7.5% based on their preferred share payments and stock market experience.
So 16/7.5 multiply that by 28 billion so that is 60 billion.
Then an advanced part is to adjust based on the payout ratio. IE if you can return 16% a year and payout $0 in dividends and continuously grow at 16% than you're more attractive than if you can grow at 16% but you pay 100% in dividends.
So I would set the base level for the banking industry is like 70%.
However multiply the $60B by 5% at 60%, 10% at 50% payout, 15% at 40% etc And do the opposite going down.
So this is a quick way to do my more advanced banking formula but it will get similar results to my formula.
So USB for instance had tangible equity last quarter of $26 B (3Q) Common shareholders earned $1,389 this quarter or (1389 X 4 5,556 and 5,5556/ 26000 = a return on tangible equity of 21%.
So multiply their tangible equity by 26 X (21% /7.5% discount rate) which equals 72.8 B then reduce it by 5% for each amount their payout ratio is over 70% so about 15%.
So I think USB's intrinsic value quickly calculated is 62 B.
However the market is less advanced than me and doesn't penalize USB for their inability to grow over time. In the year 2000 I think WFC and USB were the same size now WFC is like 6 times bigger. USB banks for metrics
When did I mention that? I am still going through the Q4 earnings report. For COF I think its worth $95-$100 so probably a better deal after PNC has gone up 7% from earnings. However I haven't yet figured out how PNC will do next year in terms of non interest income and expense. I should be done that tonight or tomorrow.