Over the last six months, Provident Financial Services’s shares have sunk to $16.14, producing a disappointing 13.4% loss – a stark contrast to the S&P 500’s 1.9% gain. This may have investors wondering how to approach the situation.
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Even though the stock has become cheaper, we’re cautious about Provident Financial Services. Here are three reasons why we avoid PFS and a stock we’d rather own.
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Provident Financial Services, its EPS declined by 3.8% annually over the last five years while its revenue grew by 16.8%. This tells us the company became less profitable on a per-share basis as it expanded.
For banks, tangible book value per share (TBVPS) is a crucial metric that measures the actual value of shareholders’ equity, stripping out goodwill and other intangible assets that may not be recoverable in a worst-case scenario.
Disappointingly for investors, Provident Financial Services’s TBVPS continued freefalling over the past two years as TBVPS declined at a -5.2% annual clip (from $15.76 to $14.15 per share).
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.
