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Bank stocks have got off to a good start until 2021, but it’s not too late for investors to find opportunities.
The sector is up 12% this year, according to the KBW Bank Index (ticker: BKX), as lenders are ready to start reporting fourth quarter profits.
JPMorgan Chase
(JPM),
Wells fargo
(WFC) and
Citigroup
(C) will kick things off on Friday.
Bank stocks had rebounded strongly in the last two months of 2020 even before the rally of the last two weeks. Those holding the shares were pulverized in March but were granted a stay in November as positive vaccine news emerged and election results raised hopes that government spending would support the economy.
Investors will be looking for signs that the recovery may continue. They’ll want proof that lenders have set aside enough money to cover potential loan losses, and hope some will discuss when the billions they’ve put in reserves can be released into profits. Investors will also want to hear bank CEOs’ assessment of how quickly the pandemic’s damage to the economy could heal.
While several bank stocks have returned to their pre-pandemic levels, some still have room to rise before they get there. Other banks may lag behind their peers based on the assessment.
Barron’s recently launched a screen of 64 of the largest banks based on price versus tangible book value, return on equity and dividend yield, using data from Bloomberg. On average, we found that the cohort was trading at 1.8 times the tangible book value. We then looked for lenders who traded below this level and had a history of higher ROE.
(A table showing the results is below.)
Based on this analysis and some qualitative data, we found six banks that could offer some interesting opportunities. Two of the banks Barron’s identified are self-help stories that may represent the most exciting opportunities for investors.
Citigroup and Wells Fargo are trading at 0.9 times tangible book value and 1 times tangible book value, respectively. Citigroup stocks were particularly battered late last year when the bank was slapped with a $ 400 million consent order by regulators for weaknesses in its risk management and internal controls. The bank had already tried to remedy these shortcomings; the title could benefit from it when Jane Fraser officially takes over as CEO next month.
Wells Fargo is in the midst of a multi-year effort to recover from its fake accounts scandal, which emerged in 2016. Under the leadership of CEO Charlie Scharf, who has been in the post for just over a year, the bank is looking to reduce costs and become more efficient. UBS analysts recently estimated that with every 1 percentage point reduction in the bank’s efficiency ratio for 2022, pre-tax profits could rise 3.8%.
Goldman Sachs
was not as badly hit as other banks during the 2020 downturn. In fact, thanks to robust trading and trading activity in the second half of the year, the stock was able to post a gain. But even with its strength, Goldman is trading at 1.3 times its tangible book value. Activity in financial markets is expected to remain strong in 2021 and the bank plans to resume share buybacks this year, so Goldman’s stock still has some juice.
Fifth third Bancorp
(FITB) also looks good under Barron’s screen, trading at 1.4 tangible book value. The bank is expected to benefit from cost-cutting and share buyback initiatives, while currently offering a dividend yield of 3.4%.
Comerica
(CMA), which is trading at 1.2 times the tangible portfolio while generating a 4.3% return, may also offer an attractive opportunity for investors.
Finally, in Columbus, Georgia
Synovus Financial,
trading at 1.3 times the tangible pound and yielding 3.5%, is another bank that investors will want to look at. Analysts at Keefe, Bruyette & Woods recently said the bank was a likely candidate for the merger, which could also be a catalyst for action.
Write to Carleton English at [email protected]
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