Provident Financial Services has been treading water for the past six months, recording a small loss of 4.2% while holding steady at $18.50. The stock also fell short of the S&P 500’s 4.5% gain during that period.

Is now the time to buy Provident Financial Services, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Is Provident Financial Services Not Exciting?

We don't have much confidence in Provident Financial Services. Here are three reasons why we avoid PFS and a stock we'd rather own.

1. EPS Barely Growing

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Provident Financial Services’s EPS grew at an unimpressive 3.6% compounded annual growth rate over the last five years, lower than its 16.8% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.

2. Declining TBVPS Reflects Erosion of Asset Value

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.

To the detriment of 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).

3. High Interest Expenses Increase Risk

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.

Over the last two years, Provident Financial Services has averaged a Tier 1 capital ratio of 10.7%, which is considered unsafe in the event of a black swan or if macro or market conditions suddenly deteriorate. For this reason alone, we will be crossing it off our shopping list.

Final Judgment

Provident Financial Services isn’t a terrible business, but it doesn’t pass our quality test. With its shares underperforming the market lately, the stock trades at 0.9× forward P/B (or $18.50 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.

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