PNC Financial Services Group has been treading water for the past six months, recording a small loss of 4.7% while holding steady at $191.55. The stock also fell short of the S&P 500’s 5.4% gain during that period.

Is now the time to buy PNC Financial Services Group, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Is PNC Financial Services Group Not Exciting?

We don't have much confidence in PNC Financial Services Group. Here are three reasons why PNC doesn't excite us and a stock we'd rather own.

1. Net Interest Income Points to Soft Demand

Our experience and research show the market cares primarily about a bank’s net interest income growth as one-time fees are considered a lower-quality and non-recurring revenue source.

PNC Financial Services Group’s net interest income has grown at a 6.9% annualized rate over the last five years, slightly worse than the broader bank industry. Its growth was driven by both an increase in its outstanding loans and net interest margin, which represents how much a bank earns in relation to its outstanding loan book.

2. TBVPS Projections Show Stormy Skies Ahead

The key to tangible book value per share (TBVPS) growth is a bank’s ability to earn consistent returns on its assets that exceed its funding costs and credit losses.

Over the next 12 months, Consensus estimates call for PNC Financial Services Group’s TBVPS to shrink by 5.3% to $112.23, a sour projection.

3. High Interest Expenses Increase Risk

Leverage is core to the bank’s business model (loans funded by deposits) and to ensure their stability, regulators require certain levels of capital and liquidity, focusing on a bank’s Tier 1 capital ratio.

Tier 1 capital is the highest-quality capital that a bank holds, consisting primarily of common stock and retained earnings, but also physical gold. It serves as the primary cushion against losses and is the first line of defense in times of financial distress.

This capital is divided by risk-weighted assets to derive the Tier 1 capital ratio. Risk-weighted means that cash and US treasury securities are assigned little risk while unsecured consumer loans and equity investments get much higher risk weights, for example.

New regulation after the 2008 financial crisis requires that all banks must maintain a Tier 1 capital ratio greater than 4.5% On top of this, there are additional buffers based on scale, risk profile, and other regulatory classifications, so that at the end of the day, banks generally must maintain a 7-10% ratio at minimum.

Over the last two years, PNC Financial Services Group has averaged a Tier 1 capital ratio of 11.7%, which is considered unsafe in the event of a black swan or if macro or market conditions suddenly deteriorate. For this reason alone, we will be crossing it off our shopping list.

Final Judgment

PNC Financial Services Group isn’t a terrible business, but it doesn’t pass our bar. With its shares underperforming the market lately, the stock trades at 1.4× forward P/B (or $191.55 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. We’d recommend looking at the Amazon and PayPal of Latin America.

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