The financial sector displayed marked resilience and stability in the aftermath of bank collapses earlier this year. Nevertheless, investor apprehension persists following pessimistic forecasts from top rating agencies.

Therefore, in this article, I have evaluated bank stocks Bank of America Corporation (BAC) and The PNC Financial Services Group, Inc. (PNC) to discern which of the two promises a more lucrative future amid ongoing economic volatility. Based on a comprehensive fundamental comparison outlined below, BAC emerges as the one worth monitoring due to its stronger fundamentals relative to PNC.

In the aftermath of the upheaval brought about by the implosion of several regional banks, there have been emerging indicators of stability within the banking sector.

These signs of recovery surface when the Fed has increased the benchmark interest rates to its pinnacle in over two decades, a trend anticipated to reverse in the following year due to rate reductions. Increased interest rates often produce gains for banks through elevated net interest income.

Nonetheless, the stability comes into question just two weeks following Moody's decision to slash the credit ratings of 10 intermediate and small-scale banks. Furthermore, Fitch has issued warnings, and now S&P Global Ratings has downgraded five American banks, putting an additional two on alert due to a challenging high-interest rate commercial climate.

The series of downgrades by credit rating agencies would likely make it harder and more expensive for borrowers to get loans. Combined with the Fed's interest rate hikes, banks are under pressure to offer enhanced returns on deposits as customers begin to look toward more lucrative alternatives.

In terms of price performance, BAC has lost 1.1% intraday, whereas PNC has lost 1.4%. However, over the past three months, BAC has gained marginally to close the last trading session at $28.65, while PNC plunged 2.3% to close the last trading session at $120.49.

Here are some reasons why the future looks more profitable for BAC than PNC:

Latest Development

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 solution is a cost-efficient and customer-friendly payment option for companies wanting to replace cash or cheque payments.

On August 16, PNC FIG Advisory, part of PNC Capital Markets LLC, announced an expansion to its client offerings by introducing PNC Asset Exchange, an online loan resource and marketplace for financial institutions.

PNC Asset Exchange is powered by Community Capital Technology Inc.'s loan marketplace and business intelligence platform. It will provide PNC's financial institution clients with a more efficient, effective way to optimize their loan portfolios.

Recent Financial Results

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 income applicable to common stockholders rose 19.7% year-over-year to $7.10 billion.

Additionally, its earnings per share came in at $0.88, representing an increase of 20.5% year-over-year. Also, its net interest income rose 13.8% over the prior-year quarter to $14.16 billion. In addition, its CET1 ratio came in at 11.6%, compared to 10.5% in the year-ago quarter.

For the second quarter that ended June 30, 2023, PNC’s total revenue stood at $5.29 billion. Its net income and net income per share stood at $1.50 billion and $3.36, respectively.

In addition, its net interest income declined 15% year-over-year to $3.51 billion. Its CET1 capital ratio was 9.5%, compared to 9.6% in the year-ago quarter.

Past and Expected Financial Performance

BAC’s net income has grown at a 13.6% CAGR over the past three years, while PNC’s revenue has declined at 9.3% CAGR over the same period. BAC’s tangible book value grew at 2.4% and 1.6% CAGRs over the past three and five years, respectively, while PNC’s declined at 7.8% and 1.6% CAGRs over the same periods.

For the fiscal year ending December 2023, BAC’s revenue and EPS are expected to increase 6.3% and 6.4% year-over-year to $100.94 billion and $3.39, respectively.

However, for the fiscal year ending December 2024, BAC’s revenue and EPS are expected to decline 0.5% and 3.4% year-over-year to $100.40 billion and $3.28 billion, respectively. Furthermore, the company surpassed revenue and EPS estimates in each of the trailing four quarters, which is impressive.

PNC’s revenue for the fiscal year ending December 2023 is expected to come at $21.62 billion, while for the fiscal year 2024, it is expected to decline marginally year-over-year to $21.60 billion. For the fiscal year 2023 and 2024, its EPS is expected to decline 3.7% and 8.2% year-over-year to $13.44 and $12.34, respectively.

Profitability

BAC’s trailing-12-month cash from operation margin is $44.64 billion compared to PNC’s $12.57 billion. Also, BAC’s trailing-12-month net income margin of 30.88% compared to PNC’s 29.80%.

Thus, BAC is more profitable.

Valuation

In terms of forward non-GAAP P/E, BAC is currently trading at 8.44x, 5.9% lower than PNC, which is trading at 8.97x. BAC’s forward Price/Book multiple of 0.86 is 21.8% lower than PNC’s 1.10.

POWR Ratings

BAC has an overall rating of C, which equates to a Neutral in our POWR Ratings system. On the other hand, PNC has an overall rating of D, which translates to Sell. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. BAC’s Value grade of B is in sync with the discounted valuation. The stock’s forward Price/Sales and Price/Book of 2.26x and 0.86x are 2% and 14.3% lower than the industry averages of 2.30% and 1.01%.

PNC’s mixed valuation justifies its C grade for Value. In terms of forward Price/Sales, the stock is trading at 2.22x, 3.6% lower than the 2.30x industry average. However, its forward Price/Book multiple of 1.10 is 8.9% higher than the industry average of 1.01.

Furthermore, BAC has a C grade for Growth, in sync with its mixed financials. Conversely, PNC’s poor financial performance in the last reported quarter justifies its D grade for Growth.

Within the Money Center Banks industry, BAC is ranked #2, while PNC is ranked #6 out of 10 stocks.

Beyond what we’ve stated above, we have also rated both stocks for Momentum, Stability, Sentiment, and Quality. Click here to view BAC ratings. Get all PNC ratings here.

The Winner

Both BAC and PNC are expected to generate higher net interest income amid the prevailing high interest rates.

However, PNC's financial footing encountered an upheaval in August when credit rating agency Moody’s revised its outlook for PNC from ‘stable’ to ‘negative.’

On the contrary, BAC presents more robust profitability prospects underlined by superior financial performance and discounted valuation, forecasting a potentially profitable future for the bank.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. While there are currently limited investment options in the banking sector, check all the top-rated stocks in the Money Center Banks industry here.

What To Do Next?

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BAC shares were trading at $28.32 per share on Wednesday morning, down $0.33 (-1.15%). Year-to-date, BAC has declined -12.53%, versus a 17.47% rise in the benchmark S&P 500 index during the same period.

The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.

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