Bank Earnings Showdown: Pinnacle Financial Partners (PNFP) and Citizens Financial (CFG)

Earlier last year, the U.S. banking sector faced numerous challenges, including the failure of three regional banks, higher deposit outflows, and strict lending standards. Since then, conditions in the banking industry have stabilized moderately, thanks to decisive emergency actions taken by the Federal Reserve, the Federal Deposit Insurance Corporation, and the Treasury.

Bank stocks Pinnacle Financial Partners, Inc. (PNFP) and Citizens Financial Group, Inc. (CFG) are scheduled to report their fourth-quarter earnings this week. Ahead of their earnings, it could be wise to avoid these stocks due to their bleak fundamentals.

Before discussing the fundamentals of these stocks, let’s take a look at what is happening in the U.S. banking sector.

The U.S. banking crisis that erupted in early March last year unfolded at a rapid speed. Higher interest rates, declining commercial property values, and recession fears resulted in the collapses of high-profile regional banks, including Silicon Valley Bank, Signature Bank, and First Republic Bank. This news spelled trouble in the entire banking sector and unsettled the public.

While the Office of the Comptroller of the Currency (OCC) reported that the overall strength of the banking system remains sound, banks could continue to face credit, market, operational, and compliance risks.

With higher interest rates, enhanced risk in commercial real estate lending, stubborn inflation, decreasing corporate profitability, and a sluggish economy, credit risk is rising, thereby affecting the profitability of banks. Operational risk also remains elevated as cyber threats continue, with banks continuing to leverage new technology to further digitalization efforts.

According to the Federal Reserve Bank of New York staff, rising vulnerabilities leave at least some institutions under threat in the near term of increased funding pressure and capital shortfalls despite the U.S. banking sector’s strength.

“Specifically, banks’ ability to limit the pass-through of rate-hiking cycles into deposit rates allows them to benefit from higher rates, but only gradually,” the Fed blog said. “Yet, in the short-term, banks might suffer losses in their securities portfolio that might, in turn, induce funding dry-ups and substantially weaken effective capital levels.”

As per FactSet projections, the U.S. banking sector will report a nearly 21% decline in the fourth-quarter profits from the same period in 2022, reflecting higher costs to attract deposits and declining credit quality of their outstanding loans.

Amid this backdrop, you should refrain from investing in struggling bank stocks CFG and PNFP ahead of their earnings.

Let’s take a closer look at the fundamentals of these stocks:

Citizens Financial Group, Inc. (CFG)

CFG operates as the bank holding company for Citizens Bank, National Association that offers retail and commercial banking products and services to individuals, small businesses, middle-market companies, and institutions. It has two segments: Consumer Banking and Commercial Banking. It provides deposit products, home equity lending products, credit cards, and more.

CFG’s trailing-12-month ROCE and ROTA of 9.30% and 0.92% are 20.7% and 20.6% lower than the respective industry averages of 11.72% and 1.16%. Likewise, the stock’s trailing-12-month CAPEX/Sales of 1.41% is 29.1% lower than the industry average of 1.98%.

For the third quarter that ended September 30, 2023, CFG’s non-GAAP noninterest income decreased 3.9% year-over-year to $492 million. Its non-GAAP total revenue declined 7.5% from the year-ago value to $2.01 billion. The company’s non-GAAP pre-provision profit came in at $743 million, down 24.3% year-over-year.

Furthermore, the company’s non-GAAP income before income tax expense declined 50.4% year-over-year to $571 million. Its non-GAAP net income was $448 million, or $0.89 per average common share, compared to $669 million, or $1.30 per average common share in the prior year’s quarter, respectively.

Citizens Financial Group is set to report its fourth quarter and full year 2023 earnings on January 17, 2024. Analysts expect CHPT’s revenue and EPS for the fourth quarter (ended December 31, 2023) to decline 9.2% and 36.4% year-over-year to $2 billion and $0.84, respectively. Also, the company missed consensus revenue estimates in three of the trailing four quarters, which is disappointing.

For the fiscal year 2023, the company’s revenue is expected to increase 2.7% year-over-year to $8.24 billion, but its EPS is estimated to decrease 20.2% from the prior year to $3.86. In addition, Street expects CHPT’s revenue and EPS for the fiscal year 2024 to decline 3.3% and 13.8% year-over-year to $7.96 billion and $3.33, respectively.

CFG’s stock has plunged 24.4% over the past year to close the last trading session at $31.64.

CFG’s POWR Ratings reflect this bleak outlook. The stock has an overall rating of D, equating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

CFG has an F grade for Growth. It also has a D for Sentiment. In the F-rated Mid-Atlantic Regional Banks industry, it is ranked #23 among 37 stocks.

In addition to the POWR Ratings I’ve just highlighted, you can see CFG’s ratings for Value, Momentum, Quality, and Stability here.

Pinnacle Financial Partners, Inc. (PNFP)

PNFP, together with its subsidiaries, operates as the bank holding company for Pinnacle Bank and offers several banking products and services to individuals, businesses, and professional entities. It provides loan products like working capital loans and commercial real estate loans, various investment products, and fiduciary and investment management services.

PNFP’s trailing-12-month net income margin of 37.84% is 50.6% higher than the industry average of 25.13%. However, the stock’s trailing-12-month ROCE of 10.98% is 6.4% lower than the industry average of 11.72%.

In terms of forward non-GAAP P/E, PNFP is trading at 12.09x, 18% higher than the industry average of 10.24x. Also, the stock’s forward Price/Sales multiple of 3.80 is 44.7% higher than the industry average of 2.63.

PNFP’s total revenues decreased marginally year-over-year to $408.04 million for the third quarter that ended September 30, 2023. Its noninterest income was $90.80 million, down 13.4% from the prior year’s period. Its income before income taxes declined 8.6% year-over-year to $167.98 million. Its net income came in at $132.60 million, down 10.8% year-over-year.

Additionally, the company’s net income per common share decreased 11.5% from the prior year’s quarter to $1.69.

PNFP will release its fourth-quarter 2023 financial results on Tuesday, January 16, 2024, after market close. Analysts expect the company’s revenue for the quarter (ended December 2023) to increase 3.6% year-over-year to $416.37 million. However, the consensus EPS estimate of $1.67 for the same period indicates a decline of 5% year-over-year.

Furthermore, for the fiscal year 2024, Street expects PNFP’s revenue to grow 5% year-over-year to $1.77 billion. However, the company’s EPS for the ongoing year is estimated to decrease 1.7% from the previous year to $6.87. Moreover, Pinnacle Financial Partners failed to surpass the consensus revenue estimates in three of the trailing four quarters.

Shares of PNFP have gained 4.4% over the past month to close the last trading session at $84.46.

PNFP’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, translating to a Sell in our proprietary rating system.

PNFP has a D grade for Quality and Value. It is ranked #25 of 27 stocks in the F-rated Southeast Regional Banks industry.

Click here to access the other ratings of PNFP for Stability, Growth, Sentiment, and Momentum.

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CFG shares were unchanged in premarket trading Monday. Year-to-date, CFG has declined -4.53%, versus a 0.29% rise in the benchmark S&P 500 index during the same period.

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.

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