PNC Financial Services Group currently trades at a price-to-book value ratio of 0.96 times. That means that investors value the bank's stock at less than the value of its assets minus its liabilities. Worse yet, that valuation has decreased 10% since January 1.
In other words, something is up, and it's not the stock price. To understand what's driving the poor stock performance, let's take a closer look at the bank's current fundamentals.
What drives a bank's value?
The first step to understanding changes in valuation is to understand how the markets value banks. The banks that will command the highest valuations will be the banks with exceptional credit quality over time and robust earnings today. They will also be positioned to succeed in whatever macroeconomic environment impacts the business in the future.
Why? Because the Federal Reserve has indicated that it may not raise interest rates as quickly as the market expected. Combine this with global economic concerns and the state of oil prices, and a tough market is created for financial stocks.
In my view, however, PNC's drop could be the buying opportunity investors have been waiting for. The bank's exposure to the energy sector is limited, and management clearly articulates its risk and focus on those loans to investors on its quarterly conference calls. PNC has lowered operating costs for three consecutive years, and anticipates accomplishing the same in 2016.
Those cost savings come even as the bank rolls out major investments in technology, branch upgrades, and a modernization of the overall customer experience. It has a strong track record of risk management throughout the ups and downs of the economic cycle, and has a strong balance sheet to back it up if the economy hits a speed bump.
While its performance and valuation fall short of the elite level of U.S. Bancorp, PNC today looks like, in the words of Warren Buffet, "a well-managed bank at a fair price." Investors shouldn't worry about the rough start to 2016. In the long term, PNC's fortunes look as bright as ever.
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The article Why Wall Street Has Soured on PNC Financial Services Group Stock originally appeared on Fool.com.
Jay Jenkins has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
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