The PNC Financial Services Group, Inc. (PNC) and Citigroup Inc. (C) are scheduled to release their third-quarter results on October 13. It may not be wise to invest in PNC and C ahead of their earnings for reasons discussed throughout this article. While PNC is best avoided now, C could be a prudent watchlist addition.
For the third quarter ended September 30, 2023, PNC’s EPS and revenue are expected to decline 17.4% and 3.9% year-over-year to $3.12 and $5.33 billion, respectively. Likewise, Wall Street expects C’s EPS for the third quarter to decline 25.2% year-over-year to $1.22. However, the company’s revenue for the quarter is expected to increase 4.2% year-over-year to $19.28 billion.
Investors and analysts alike will closely watch the bank earnings to see the impact of the interest rates, which remained at their highest level in 22 years. Although deposit outflows have slowed down, banks have to pay more for deposits to stop depositors from taking out their deposits.
Moreover, banks are facing tighter lending standards and slowing loan growth due to the higher interest rates as borrowing has become expensive. Additionally, the surging U.S. Treasury yields erode the value of portfolios, including lower coupon debt that was issued when the rates were lower.
This has led to higher unrealized losses for banks, affecting their liquidity, funding, and earnings. Moreover, the banking industry’s reserves are growing, indicating that banks might be bracing for credit deterioration and losses in a recession.
DBRS Morningstar analysts Eric Chan and Michael Driscoll said, “Although credit quality remained relatively benign even as the Fed started raising interest rates in March 2022, the industry has nonetheless been increasing its reserves.”
The banking industry is also facing the threat of credit downgrades. In June, Fitch downgraded the entire U.S. banking sector and has recently warned of potential rating downgrade of America’s biggest banks. Earlier this month, Moody’s downgraded ten banks and put six others on notice. The S&P Global followed Moody’s to downgrade five U.S. banks while putting two others on notice.
Further rating downgrades could exacerbate the U.S. banking sector’s operating environment, leading to higher borrowing costs and even stricter lending standards.
Given the uncertainty around the industry, let’s examine the fundamentals of the two stocks from the Money Center Banks industry, starting with the one ranked lower from the investment point of view.
Stock #2: The PNC Financial Services Group, Inc. (PNC)
PNC is a diversified financial services company. The company has businesses engaged in retail banking, including residential mortgage, corporate and institutional banking, and asset management. Its retail branch network is located coast-to-coast. The company’s segments include Retail Banking, Corporate & Institutional Banking, and Asset Management Group.
In terms of forward non-GAAP P/E, PNC’s 9.10x is 2.5% higher than the 8.87x industry average. Its 2.26x forward Price/Sales is 1.9% higher than the 2.22x industry average. Likewise, its 1.13x forward Price/Book is 14.6% higher than the 0.99x industry average.
For the second quarter ended June 30, 2023, PNC’s noninterest income declined 13.7% year-over-year to $1.78 billion. The company’s net income attributable to common shareholders declined 3.9% year-over-year to $1.35 billion. In addition, its EPS came in at $3.36, representing a decline of 0.9% year-over-year. Also, its CET1 ratio came in at 9.5%, compared to 9.6% in the year-ago quarter.
For the quarter ended September 30, 2023, PNC’s EPS and revenue are expected to decline 17.4% and 3.9% year-over-year to $3.12 and $5.33 billion, respectively. Over the past year, the stock has declined 16.9% to close the last trading session at $122.74.
PNC’s weak prospects 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.
It is ranked #6 out of 10 stocks in the Money Center Banks industry. It has a D grade for Growth. Click here to see the other ratings of PNC for Value, Momentum, Stability, Sentiment, and Quality.
Stock #1: Citigroup Inc. (C)
C is a diversified financial service holding company that provides various financial products and services to consumers, corporations, governments, and institutions in North America, Latin America, Asia, Europe, the Middle East, and Africa. It operates through three segments: Institutional Clients Group (ICG), Personal Banking and Wealth Management (PBWM), and Legacy Franchises.
In terms of the trailing-12-month net income margin, C’s 19.09% is 26% lower than the 25.78% industry average. Likewise, its 6.69% trailing-12-month Return on Common Equity is 41.2% lower than the industry average of 11.37%.
On the other hand, in terms of the trailing-12-month Capex/Sales, C’s 8.89% is 341.6% higher than the industry average of 2.01%.
C’s total revenues, net of interest expense for the second quarter ended June 30, 2023, declined 1% year-over-year to $19.44 billion. Its net income fell 35.9% over the prior-year quarter to $2.92 billion. The company’s return on average common equity came in at 5.6%, compared to 9.7% in the prior-year quarter. Its EPS came in at $1.33, representing a decline of 39.3% year-over-year.
On the other hand, its CET1 ratio came in at 13.3%, compared to 11.95% in the year-ago quarter. Its net interest income rose 16% year-over-year to $13.90 billion. Its total assets increased 2% year-over-year to $2.42 trillion. Also, its book value per share came in at $97.87, compared to $92.95 in the prior-year quarter.
Street expects C’s EPS for the quarter ended September 30, 2023, to decline 25.2% year-over-year to $1.22. Its revenue for the same quarter is expected to increase 4.2% year-over-year to $19.28 billion. The stock has declined 8.2% year-to-date and gained 2.7% over the past year to close the last trading session at $41.53.
C’s POWR Ratings are consistent with this uncertain outlook. It has an overall rating of C, translating to Neutral in our proprietary rating system.
Within the same industry, it is ranked #5. It has a C grade for Stability and Quality. To see the other ratings of C for Growth, Value, Momentum, and Sentiment, click here.
What To Do Next?
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C shares were trading at $41.60 per share on Thursday morning, up $0.07 (+0.17%). Year-to-date, C has declined -5.01%, versus a 15.46% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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