While the banking sector was stabilizing after the failures of three relatively large regional banks, it got hit by warnings and downgrades by credit rating agencies last month. Despite prevailing headwinds, banks will likely benefit from higher interest rates as they boost margins. Also, strong demand for digital banking services should propel the industry’s long-term outlook.
Hence, it could be wise to hold bank stock Bank of America Corporation (BAC) and wait for a better entry point in this stock. However, avoiding fundamentally sound The PNC Financial Services Group, Inc. (PNC) seems prudent now.
The sudden failures of the Silicon Valley Bank and Signature Bank in March this year, followed by the collapse of the First Republic Bank in April, led to a significant loss of confidence in the U.S. banking sector, prompting bank runs and forcing the government to offer additional support to the system.
Following the washout in prices triggered by the regional banking crisis, bank stocks were in rally mode in May. However, the rally faded as top credit rating agencies Moody’s and Standard & Poor’s issued warnings and downgrades about some of the country’s biggest banks in August.
But Wall Street equity analysts argue that the banks are in better financial condition than the bond market warnings suggest. Analysts point to a period of surging bank stock prices before the bond ratings call and better-than-anticipated earnings reports that indicate the situation is better than the agencies think.
Despite near-term uncertainties, the banking industry’s long-term outlook remains bright, driven by sustained demand for banking services among retail and commercial customers. According to a report by Mordor Intelligence, the U.S. retail banking market is expected to witness a CAGR of 4.5% by 2026.
Meanwhile, the U.S. commercial banking market is projected to grow at a CAGR of 6.5% during the forecast period of 2023 and 2028.
Furthermore, the growing adoption of digital technology should propel the banking industry’s prospects. With digitalization, banks could potentially boost operational efficiencies, lower risks, reduce costs, and improve productivity.
Technological advancements such as AI, machine learning, cloud computing, robotic process automation (RPA), and blockchain pave the way for advanced digital banking solutions. For instance, different applications of AI in banking include chatbots, risk management, regulatory compliance, informed and profitable loan and credit decisions, tracking market trends, and data collection and analysis.
Moreover, banks usually benefit from rising interest rates. While the Federal Reserve hit a pause on interest rate hikes this month, keeping the federal funds rate at a range of 5.25%-5.50%, the highest level in more than 22 years, Fed officials signal one more increase this year and expect to keep rates higher for longer through 2024 than they anticipated earlier this year.
Considering these conducive trends, let’s take a look at the fundamentals of the two Money Center Banks stocks, starting with number 2.
Stock to Sell:
Stock #2: The PNC Financial Services Group, Inc. (PNC)
PNC is a diversified financial services company. It operates through three segments: Retail Banking; Corporate & Institutional Banking; and Asset Management Group. The company serves consumer and small business customers, mid-sized and large corporations, government and not-for-profit entities, and high-net-worth individuals.
In terms of forward non-GAAP P/E, PNC is trading at 9.08x, % higher than the industry average of 8.90x. Likewise, the stock’s forward Price/Book multiple of 1.11 is 13.9% higher than the industry average of 0.98.
PNC’s trailing-12-month net income margin of 29.80% is 15.6% higher than the 15.60% industry average. However, the stock’s trailing-12-month ROTA of 1.13% is 1.7% lower than the industry average of 1.15%.
Over the past three years, PNC’s net income and EPS declined at CAGRs of 9.3% and 8.2%, respectively. The company’s tangible book value and common equity decreased at 7.8% and 4.9% over the same time frame, respectively.
For the second quarter that ended June 30, 2023, PNC’s revenue was $5.29 billion, compared to $5.60 billion in the prior quarter ended March 31, 2023. The company’s net income attributable to common shareholders declined 15.7% sequentially to $1.35 billion. The company’s net income per common share stood at $3.36, compared to $3.98 in the prior quarter.
Analysts expect PNC’s EPS for the fiscal year (ending December 2023) to decline 3.7% year-over-year to $13.45. Further, the company’s EPS and revenue for the fiscal year 2024 are expected to decrease by 8.5% and 0.3% from the previous year to $12.30 and $21.58 billion, respectively.
PNC’s stock has plunged 23.4% year-to-date and 22.9% over the past year to close the last trading session at $122.17.
PNC’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, equating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
The stock has a D grade for Growth and Sentiment. It is ranked #7 out of 10 stocks in the Money Center Banks industry.
Click here to access the other ratings of PNC for Value, Quality, Stability, and Momentum.
Stock to Hold:
Stock #1: Bank of America Corporation (BAC)
BAC offers banking and financial products and services worldwide. The company serves individual consumers, small and middle-market businesses, institutional investors, large corporations, and governments. It operates through Consumer Banking; Global Wealth & Investment Management; Global Banking; and Global Markets segments.
On September 18, BAC launched CashPro Supply Chain Solutions. This new platform will provide participants in a supply chain with the benefits of digitization with enhanced process efficiency and working capital optimization. CashPro is the banking platform nearly 40,000 business clients use to manage their treasury and trade operations.
The new launch reflects the company’s commitment to modernize trade finance, driving its growth and profitability.
Also, on August 29, BAC announced the launch of its award-winning alias solution, Global Digital Disbursements, to its commercial clients holding deposit accounts at the bank’s branch in Canada. Global Digital Disbursements facilitates processing multiple B2C payments and C2B collections where the identifier is the person’s email address or mobile phone number.
The new solution is a cost-efficient and customer-friendly payment option for companies wanting to replace cash or cheque payments. This new solution launch should bode well for the company.
In terms of forward non-GAAP P/E, BAC is trading at 8.27x, 7.1% lower than the industry average of 8.90x. But the stock’s forward Price/Book and trailing-12-month Price/Cash Flow multiples of 0.84 and 4.99 are 14% and 22% higher than the respective industry averages of 0.98 and 6.40.
BAC’s trailing-12-month net income margin of 30.88% is 19.8% higher than the industry average of 25.78%. However, the stock’s trailing-12-month ROTA of 0.95% is 17.1% lower than the 1.15% industry average.
For the second quarter that ended June 30, 2023, BAC’s total revenue, net of interest expense, increased 11.1% year-over-year to $25.20 billion. Its net interest income rose 13.8% over the prior year’s quarter to $14.16 billion. The company’s net income applicable to common stockholders grew 19.7% year-over-year to $7.10 billion.
Furthermore, the company’s earnings per common share came in at $0.88, an increase of 20.5% year-over-year. As of June 30, 2023, its cash and cash equivalents stood at $373.55 billion, compared to $198 billion as of June 30, 2022.
Street expects BAC’s revenue and EPS for the fiscal year (ending December 2023) to increase 6.3% and 6.3% year-over-year to $100.91 billion and $3.39, respectively. Additionally, the company has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.
For the fiscal year 2024, the company’s revenue and EPS are expected to decline 0.8% and 4.2% from the previous year to $100.13 billion and $3.25, respectively.
Shares of BAC have declined 3.8% over the past month and 15.3% year-to-date to close the last trading session at $28.05.
BAC’s POWR Ratings reflect its mixed outlook. The stock has an overall C rating, equating to a Neutral in our proprietary rating system.
BAC has a B grade for Value and Momentum. The stock has a C grade for Quality and Sentiment. It is ranked #2 among ten stocks in the same industry.
Beyond what is stated above, we’ve also rated BAC for Stability and Growth. Get all BAC ratings here.
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BAC shares were trading at $27.98 per share on Friday morning, down $0.07 (-0.25%). Year-to-date, BAC has declined -13.58%, versus a 14.19% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...
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