However it gets even more asinine when compared to other countries financials. ICICI the second largest Bank in India has the same market value as PNC with 1/4 the earnings power and slower earnings growth and half the tangible equity. It also has contingent liabilities of almost quadruple its size and is exposed to all the risks of operating in India. India's government borrows at 8%, the bank of India's likely would have a discount rate of 12 to 13% while U.S. Banks should have a discount rate of around 7% which is ultra conservative given how low U.S. Treasuries currently yield. A quick example is a perpetuity of $1000 payments at a discount rate of 7% is 142857 compared to 12% is 8333. Despite American Banks' tremendous financial might, Indian Banks trade as if they are risk free compared to American institutions. This means that Indian banks need to have twice the earnings power and growth going forward to compensate for their lack of safety. So ICICI would have to be growing at twice the rate as PNC to have the same value assuming they both currently earned $3.2 billion. Unfortunately none of that is true for ICICI. Icici bank trades at a generous valuation even considering its recent decline.
However the true test of a stock is not to compare to a bunch of mis-priced securities where investors also have no clue what they are doing; the true test is to look at the bank itself. Overtime the market corrects and the euphoria for selling is thrown out the window (the market rarely goes up 20% in one month (From the March 2009 low the market only increased 25% in that month despite how badly mispirced securities are, they have declined close to 20% this month.). PNC Financial has seen its nonperforming loans drop to around 2%, a low for almost all U.S. Banks. PNC has leveraged this strong financial position to purchase other banks including its recent acquisition of RBC's U.S. unit. PNC has a tier 1 ratio of nearly 11% by far the highest of the 10 major banks. PNC has a tangible book value of $23 billion and earnings for the last quarter of $900 million. PNC will avoid alot of the Basel III Regulation if it comes to pass.
Basel III is a banking accord that seeks to pass new regulation to strengthen the financial economies around the world. However some of its laws can hurt growth around the world. This is because the more capital a bank has to hold the less it can lend which stalls the economy. The government lowers the interest rate when there is a recession to stimulate spending as consumers are less likely to save as they can borrow for cheaply and earn little on their savings. Despite this economic tool they have a tough time seeing the banks role in extending this credit relies on holding optimal amounts of capital. To much capital means the money is left sitting in a vault instead of building a factory.
This aside PNC trades as if it will be one of the banks struck by the harshest of regulation. J.P. Morgan trades at 1.1 tangible book value despite meeting all the criteria as an institution that may be penalized by the harshest rules of the Basel accord. Its also has had a return on tangible equity of the same number as PNC. Despite its risks it trades at a premium. JPM's price obviously also makes no sense and should trade at $55 to $60 but it is used as a basis for showing how much cheaper PNC is then another completely mispriced security. PNC is one of the most premium U.S. Financial institution along with U.S. Bancorp. These banks will avoid almost all regulation and are currently producing large returns and their stock prices make little sense.
This aside PNC trades as if it will be one of the banks struck by the harshest of regulation. J.P. Morgan trades at 1.1 tangible book value despite meeting all the criteria as an institution that may be penalized by the harshest rules of the Basel accord. Its also has had a return on tangible equity of the same number as PNC. Despite its risks it trades at a premium. JPM's price obviously also makes no sense and should trade at $55 to $60 but it is used as a basis for showing how much cheaper PNC is then another completely mispriced security. PNC is one of the most premium U.S. Financial institution along with U.S. Bancorp. These banks will avoid almost all regulation and are currently producing large returns and their stock prices make little sense.
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