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deep-dive:-bank-stocks-are-cheap-—-here-are-the-20-best-players-in-the-industry
deep-dive:-bank-stocks-are-cheap-—-here-are-the-20-best-players-in-the-industry

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Deep Dive: Bank stocks are cheap — here are the 20 best players in the industry

Bank stocks have had a good run in 2021, but they still lag behind the broader market’s recovery since the pandemic doldrums of 2020. And now that the Federal Reserve seems likely to allow interest rates to rise soon, the banks may have an easier time improving their profits.

Below is a list of the best-performing U.S. banks over the past five years, based on returns on common equity.

During her recent discussion of stock-market strategy on CNBC, Savita Subramanian, the head of U.S. equity and quantitative strategy at Bank of America, said that small-cap stocks, especially energy and financial companies, were trading at compelling valuations and could give investors “more earnings yield for the same price.”

Here’s a recent screen of energy stocks.

Low valuations

Taking a broad look at forward price-to-earning valuations for the S&P 1500 Composite Index
XX:SP1500
(made up of the large-cap S&P 500
SPX,
the S&P 400 Mid Cap Index
MID
and the S&P Small Cap 600 Index
SML
), bank stocks are trading relatively cheaply:


FactSet

The S&P 1500 bank industry group trades at a price-to-earnings ratio of 12.6, based on weighted consensus price-to-earnings estimates for the next 12 months among analysts polled by FactSet. The full S&P 1500 Composite Index trades at a forward P/E of 20.5. The average forward P/E for the banks over the past 15 years has been 12.5, while the average forward P/E for the full index has been 15.4.

So the banks now trade for 61% of the S&P 1500’s forward P/E valuation, while they have traded for 81% on average.

And that is despite the banks’ outperformance this year, returning 34%, while the S&P Composite 1500 has returned 20%.

A coming slowdown of bond purchases by the Federal Reserve is expected to push long-term interest rates higher, which for most banks will mean increased profitability, with wider spreads between rates on loans and those paid on deposits. The market has been anticipating the Fed’s change in policy, pushing yields on 10-year U.S. Treasury notes
BX:TMUBMUSD10Y
to 1.49% early on Sept. 27 from 1.31% on Sept. 20.

Bank-stock screen — return on common equity

While Subramanian emphasized small-cap stocks, it seems reasonable to look at all bank stocks and find the ones with the best average returns on common equity. A screen on ROCE can work well within an industry such as banking, because the banks are required to hold minimum levels of capital, including common equity, by regulators. In other industries you may have healthy profitable companies that have negative equity. An example is McDonald’s Corp.
MCD,
which had negative total shareholders’ equity of $5.8 billion as of June 30.

It also makes sense to include large banks in our screen because the biggest and most complex U.S. banks are required by regulators to hold more capital than smaller banks. If a big bank make makes the list, so be it: Its ROCE denominator is larger, so it has more of a hill to climb.

Starting with the Russell 3000 Index, which represents about 98% of U.S. stocks by market capitalization, we identified 229 banks. This includes some companies that are investment banks and/or brokers. The determining factor for a company such as Charles Schwab Corp.
SCHW,
for example, is whether of not it files a bank or savings and loan holding company report with the Federal Reserve. If it does, it means the company is gathering deposits insured by the FDIC. Schwab does so through its subsidiary, Charles Schwab Bank SSB.

Looking back over the past 20 reported quarters through June 30, here are the 20 banks with the highest average returns on common equity. The list is limited to U.S. banks for which the data is available from FactSet for all of those quarters.

Company

City

Market cap. ($mil)

Average ROCE – 20 quarters

Total return – 5 years

Ameriprise Financial Inc.
AMP
Minneapolis

$30,871

27.66%

208%

American Express Co.
AXP
New York

$139,598

22.95%

197%

MetroCity Bankshares Inc.
MCBS
Doraville, Ga.

$530

22.80%

434%

Discover Financial Services
DFS
Riverwoods, Ill.

$38,934

22.58%

153%

ServisFirst Bancshares Inc.
SFBS
Birmingham, Ala.

$4,176

18.32%

216%

Synchrony Financial
SYF
Stamford, Conn.

$28,616

18.07%

108%

Axos Financial Inc.
AX
Las Vegas

$2,769

16.82%

108%

SVB Financial Group
SIVB
Santa Clara, Calif.

$38,129

16.63%

493%

Western Alliance Bancorp
WAL
Phoenix

$10,740

16.61%

188%

Hingham Institution for Savings
HIFS
Hingham, Mass.

$738

16.46%

168%

Bank of Hawaii Corp.
BOH
Honolulu

$3,301

15.64%

30%

Charles Schwab Corp.
SCHW
Austin, Texas

$136,720

15.38%

162%

Preferred Bank
PFBC
Los Angeles

$982

15.33%

106%

West Bancorp Inc.
WTBA
West Des Moines, Iowa

$488

14.85%

74%

Stock Yards Bancorp Inc.
SYBT
Louisville, Ky.

$1,468

14.35%

90%

Lakeland Financial Corp.
LKFN
Warsaw, Ind.

$1,691

14.18%

110%

Flagstar Bancorp Inc.
FBC
Troy, Mich.

$2,647

14.10%

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83%

East West Bancorp Inc.
EWBC
Pasadena, Calif.

$10,669

14.01%

127%

First Financial Bankshares Inc.
FFIN
Abilene, Texas

$6,402

13.76%

165%

Raymond James Financial Inc.
RJF
St. Petersburg, Fla.

$19,165

13.71%

160%

Source: FactSet

Click on the tickers for more about each bank. The MarketWatch quote page can be an excellent start for your own research. Click here for Tomi Kilgore’s new, detailed guide to the wealth of information available for free on the quote page.

You can see that most of the banks on the list are relatively small, backing Subramanian’s preference for small-caps. But American Express Co.
AXP
made the list, along with Schwab and credit card players Discover Financial Services
DFS
and Synchrony Financial
SYF.

The right-most column contains total returns, with dividends reinvested, for the past five years through Sept. 24. In comparison, the S&P 1500 banking industry group returned 124% and the S&P Composite 1500 returned 111% over the same period.

Analysts’ price targets

Here’s the list again, in the same order, with a summary of analysts’ opinions, dividend yields and forward P/E ratios:

Company

Share “buy” ratings

Closing price – Sept. 24

Consensus price target

Implied 12-month upside potential

Dividend yield

Forward P/E

Ameriprise Financial Inc.
AMP
77%

$271.40

$292.50

8%

1.67%

11.9

American Express Co.
AXP
45%

$175.72

$182.35

4%

0.98%

22.4

MetroCity Bankshares Inc.
MCBS
0%

$20.80

$22.50

8%

2.31%

8.2

Discover Financial Services
DFS
54%

$130.01

$136.22

5%

1.54%

10.4

ServisFirst Bancshares Inc.
SFBS
0%

$77.05

$70.33

-9%

1.04%

20.4

Synchrony Financial
SYF
77%

$50.23

$57.21

14%

1.75%

8.9

Axos Financial Inc.
AX
88%

$46.65

$56.00

20%

0.00%

13.0

SVB Financial Group
SIVB
61%

$649.96

$671.65

3%

0.00%

26.0

Western Alliance Bancorp
WAL
92%

$103.07

$120.42

17%

1.36%

11.6

Hingham Institution for Savings
HIFS
N/A

N/A

N/A

N/A

0.59%

N/A

Bank of Hawaii Corp.
BOH
17%

$81.55

$90.80

11%

3.43%

15.9

Charles Schwab Corp.
SCHW
63%

$75.59

$83.83

11%

0.95%

23.0

Preferred Bank
PFBC
50%

$65.91

$73.00

11%

2.31%

10.4

West Bancorp Inc.
WTBA
0%

$29.48

$32.00

9%

3.26%

10.8

Stock Yards Bancorp Inc.
SYBT
25%

$55.23

$54.33

-2%

2.03%

17.8

Lakeland Financial Corp.
LKFN
0%

$66.83

$63.67

-5%

2.04%

18.2

Flagstar Bancorp Inc.
FBC
60%

$50.08

$62.75

25%

0.48%

7.8

East West Bancorp Inc.
EWBC
83%

$75.20

$90.91

21%

1.76%

12.6

First Financial Bankshares Inc.
FFIN
0%

$44.97

$45.33

1%

1.33%

30.3

Raymond James Financial Inc.
RJF
82%

$93.13

$106.79

15%

1.12%

14.2

Source: FactSet

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