PNC Bank Corp. may be ill-prepared for a slowdown in the economy, an analyst contends.
PNC's shares already trade at 13.5 times projected 1999 earnings, while its peers' shares trade at about 15 times, said David C. Stumpf of A.G. Edwards & Sons.
He said he "would not be opposed" to investors selling the shares. The banking company's slowing earnings growth and declining loan-loss reserves suggest it could continue to perform poorly, Mr. Stumpf added.
PNC rose 68.75 cents, to $51.9375, Thursday, when bank stocks were up. The Standard & Poor's bank index rose 1.24% and the Dow Jones industrial average 0.16%. The Nasdaq bank index fell 0.80% and the S&P 500 rose 0.68%.
Mr. Stumpf reiterated his "maintain" rating and his 1998 and 1999 earnings-per-share estimates of $3.60 and $3.80, respectively.
But the tone of his report suggested the company could earn a downgrade if its shares appreciate without improvement in its business operations. The rating below "maintain" in A.G. Edward's five-tier ratings system is "reduce."
Mr. Stumpf was not available for comment but wrote in his report that he is "not overly confident in our 1998 earnings-per-share estimate."
He also noted that he had "been concerned about the quality of PNC's reported earnings for some time."
PNC's third-quarter results, which were reported last week, reflect slowing earnings momentum and declining reserve levels and show an increasing probability of "a negative earnings surprise in 1999," the analyst said.
PNC earnings-per-share growth slipped to 9.6% in the third quarter from 11.1% in the second quarter. Mr. Stumpf forecasts that 1999 third-quarter earnings per share growth will slip even further, to 5.5%.
The company's loan-loss reserve ratio-a measurement of a its preparedness for bad loans-has slipped on a regular basis since the second quarter in 1997.
This year it fell to 1.44% in the third quarter from 1.53% in the second quarter. Mr. Stumpf forecasts a loan-loss reserve ratio of 1.36% in 1999.
Mr. Stumpf said PNC will probably be included in any rally bank stocks enjoy if the Fed decides to lower short-term interest rates further, but said any rise in the stock could make it overvalued.
The market has already factored in PNC's lower-quality earnings, below average earnings-per-share growth, and waning attractiveness as a takeover target because of the slowdown in the consolidation, Mr. Stumpf said.
The company has used a number of financial engineering tools to bolster its earnings and stocks price. "In essence, we believe (those) tools ... are very close to having run their course."
