Equity Research Valuation Frameworks for Major U.S. Banks

The PNC Financial Services Group, Inc. (PNC) We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $110 PO and assign a 1.4x multiple to 2017E TBV and 14x multiple on 2017E EPS, in line with target multiples for the median large regional banks under coverage. We have weighted the P/E and P/TBV factors equally at 40%, and our DCF analysis by 20%. A superior profitability profile suggests an above peer multiple - however, a challenging macro backdrop and specific industry headwinds restrain our P/E target. Our DCF assumes a two-stage cost of capital of 9.6% and 11.2% and a terminal growth rate of 4%, Risks are macro risks such as a lower for longer rate environment, the implementation of a strict liquidity coverage ratio and further regulation on overdraft income that restricts bank profitability. U.S. Bancorp (USB) We use a three-factor valuation framework (P/E, P/TBV, DCF} to arrive at our $50 PO, assigning an above peer 2.8x multiple to 2017E TBV and near median 14.5x multiple on 2017E EPS due to their above median profitability. We have weighted the P/E and P/TBV factors equally at 40%, and our DCF analysis by 20%. Our DCF assumes a two- stage cost of capital of 9.5% and 10.9% and a terminal growth rate of 5%. Risks to our price objective are macro risks such as a double dip recession, the implementation of a strict liquidity coverage ratio and further regulation on overdraft income that restricts bank profitability. Specific to USB, risks are enhanced regulatory scrutiny and capital standards as a Domestic SIFIl and an announcement of a large expensive deal that could weigh on the stock price. UMB Financial Corporation (UMBF) We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $78 price objective and assign a 1.8x multiple to our 2Q17E TBY, in-line with peers, and we place a 18x multiple on our 2017E EPS, above peers given our above median EPS growth forecast. Our DCF model assumes cost of equity of 8% and a terminal growth rate of 4%, Downside risks to our price objective are continued rising long rates, which could negatively impact the company's sizable securities book and erode tangible book value. In addition, a sudden outflow of deposits could impact EPS and the asset sensitivity of UMBF's balance sheet to higher interest rates. Upside risks to our price objective are a much faster asset mix change into higher yielding loans that significantly increases its net interest margin. Wells Fargo & Company (WFC) We use a three-factor valuation framework (P/E, P/TBV, DCF} to arrive at our $55 PO, assigning a 1.75x multiple to 2017E TBV and 13x multiple on 2017E EPS. We have weighted the P/E and P/TBV factors equally at 40%, and our DCF analysis by 20%. Our 1.6x TBV multiple represents a 0.3x premium to our mega-cap median multiple, but we believe this is justified due to WFC's superior returns on tangible equity (ROTE consistent between 13%-14% throughout our forecast period, versus 12% for peers). Our 12x EPS multiple is in line with our mega-cap median multiple. We believe WFC deserves to trade at a premium due to better earnings growth, but we are assuming WFC trades in line with peers due to a higher percentage of earnings from mortgage banking and accretable yield, as well as potentially greater regulatory scrutiny as the second largest US depository. Our DCF assumes a two-stage cost of capital of 11% and a terminal growth rate of 4%. 74 2016 Future of Financials Conference | 17 November 2016 Bankof America 2 Merrill Lynch HOUSE_OVERSIGHT_014388