MW 11 favored bank stocks that still trade at cheap valuations

By Philip van Doorn

Bank stocks have been on quite a tear as interest rates have declined. But many appear to have room to run as the cost for deposits goes down.

Bank stocks have been rallying, but there are still a good number that are favored by analysts while still trading low to book value as funding costs go down.

Over the past several years, there have been many events that have soured investors on bank stocks, including three failures of large regional banks during the first half of 2023, pressure on commercial real estate valuations and high short-term interest rates that narrowed many lenders' net interest margins.

But look at how bank-stock indexes have rallied over the past three months though Wednesday:

The KBW Nasdaq Bank Index BKX is made up of 24 of the largest U.S. banks. It is tracked by the Invesco KBW Bank ETF KBWB, which holds all of the stocks in the index. The index and the exchange-traded fund are weighted by market capitalization, subject to an 8% maximum when the index is rebalanced quarterly. Here is how the ETF's top five holdings are weighted currently:

   Bank                       Ticker   % of KBWB  Price/ tangible book value  P/ TBV one year ago  5-year average P/ TBV  Share buy ratings 
   Morgan Stanley               MS         8.05%                        2.42                 2.04                   1.94                26% 
   Goldman Sachs Group Inc.     GS         7.94%                        1.56                 1.11                   1.21                71% 
   $Bank of America Corp(BAC-N)$.       BAC         7.88%                        1.55                 1.19                   1.59                54% 
   JPMorgan Chase & Co.        JPM         7.66%                        2.29                 1.86                   2.03                69% 
   Wells Fargo & Co.           WFC         7.53%                        1.36                 1.13                   1.23                48% 
                                                                                                                            Source: FactSet 

The table points to a broader stock screen below, as it includes price/tangible book value ratios. Tangible book value excludes intangible assets such as goodwill and loan-servicing rights. Ratios of price to tangible book can vary by banks' business models, with higher valuations for those with high levels of fee income relative to interest income.

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The trend has been for the P/TBV valuations to rise significantly over the past year. Among these five banks, only Bank of America $(BAC.SI)$ trades at a P/TBV ratio below its five-year average. And a majority of analysts polled by FactSet rate the stock a buy.

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A broader screen of bank-stock valuations and ratings

For an expanded screen of U.S. bank stocks, we started with the 24 companies in the KBW Nasdaq Bank Index and then added the 50 in the KBW Nasdaq Regional Banking Index XX:KRX, which is tracked by the Invesco KBW Regional Banking ETF KBWR.

So far this year, the KBW Nasdaq Bank Index has returned 17%, with dividends reinvested, while the KBW Nasdaq Regional Banking Index has returned only 1.2%. But over the past three months, the regional banking group has been coming on strong, as you can see on the chart above. And both banking groups have had much higher returns than the S&P 500 SPX over the past three months.

Investors' recent enthusiasm for banks might be driven by anticipated declines in interest rates on deposit accounts. The Federal Open Market Committee cut its target range for the federal-funds rate by half a point on Sept. 18. The Fed's next policy meeting will be Nov. 6-7.

Starting with the full screen of 74 banks, 39 of their stocks were trading at P/TBV valuations below their five-year averages, as of the close on Wednesday.

Among the 39 trading at discounted valuations, 11 had majority buy or equivalent ratings among analysts polled by FactSet.

Here they are, sorted by percentage of buy ratings:

   Bank                         Ticker City                 Total assets ($bil)  P/ TBV  5-year average P/ TBV  Share buy ratings 
   East West Bancorp Inc.        EWBC  Pasadena, Calif.                     $72    1.64                   1.69                94% 
   Western Alliance Bancorp.     WAL   Phoenix                              $81    1.73                   1.91                88% 
   Webster Financial Corp.       WBS   Stamford, Conn.                      $77    1.47                   1.58                81% 
   F.N.B. Corp.                  FNB   Pittsburgh                           $48    1.38                   1.42                78% 
   Prosperity Bancshares Inc.     PB   Houston                              $40    1.83                   1.99                75% 
   $Citigroup Inc(C-N)$.                 C    New York                          $2,406    0.69                   0.74                68% 
   Eastern Bankshares Inc.       EBC   Boston                               $21    1.17                   1.39                60% 
   Banc of California Inc.       BANC  Santa Ana, Calif.                    $35    0.98                   1.10                60% 
   First Horizon Corp.           FHN   Memphis, Tenn.                       $82    1.25                   1.53                59% 
   Bank of America Corp.         BAC   Charlotte, N.C.                   $3,258    1.55                   1.59                54% 
   M&T Bank Corp.                MTB   Buffalo, N.Y.                       $209    1.69                   1.70                52% 
                                                                                                                  Source: FactSet 

Click on the tickers for more about each bank, including news coverage, financials and estimates, price targets and dividend yields.

Click here for Tomi Kilgore's guide to the wealth of information available for free on the MarketWatch quote page.

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-Philip van Doorn

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September 26, 2024 09:55 ET (13:55 GMT)

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