By Carleton English
Bank stocks are scary -- scary enough that it might just be time to start buying them again.
No one denies that bank stocks have had, um, challenges this year and face a difficult future. The past three months saw the collapse of three major banks -- Silicon Valley Bank, Signature Bank, and First Republic -- and the aftermath will include tighter regulation, rising funding costs, and, perhaps, a recession.
But these risks are what we'd call known knowns and are priced into the stocks -- perhaps too much. The sector now trades for about seven times 2025 earnings estimates, according to Wells Fargo analyst Mike Mayo, who says banks won't see their earnings cut by a third or in half, as some doomsayers suggest. Bank stocks have been "excessively penalized," he writes. "[They're] more investible than appreciated."
Mayo has long favored the largest banks, JPMorgan Chase (ticker: JPM) and Citigroup (C) among them, arguing that their diversified business models and access to multiple funding sources allow them to weather economic storms better. But he's recently come around to other stocks such as U.S. Bancorp $(USB)$, Bank of America $(BAC.SI)$, and State Street $(STT)$, given their current earnings multiples: U.S. Bancorp trades for 6.9 times 12-month forward earnings, according to FactSet, while BofA trades for 8.4 times and State Street, 8.7 times.
Badly beaten-up regional bank stocks are also worth a look. They've been hit harder than their larger peers -- the SPDR S&P Regional Banking exchange-traded fund $(KRE)$ is down 31% this year after gaining 4.1% this past week, versus the 24% drop in the KBW Nasdaq Bank Index -- as most of the recent banking tumult was centered around fears of deposit flight at smaller institutions. But with deposits stabilizing, regionals face the same set of risks as larger banks with one exception: They are likely to face tighter regulation to ensure they won't be as vulnerable to flighty deposits. But given how much the regionals have sold off, those fears also look baked into prices.
"While near-term [earnings per share] trends are likely to be sluggish, expectations are very low given deeply discounted valuations and we remain constructive on most of the regional banks at current prices," writes Baird analyst David George.
How discounted are valuations? Citizens Financial Group (CFG) and Comerica $(CMA)$, two banks George rates Outperform, are both trading below tangible book value. He believes that Citizens could catch up to peers at trade at 1.45 times tangible book value, implying a stock price of $44 per share, 66% above recent trading levels. As for Comerica, George sees shares more than doubling to $80 apiece, helped by the bank's "solid" credit risk management and improving trends in its securities book.
Get over the fear, and they may just be worth a look.
Write to Carleton English at carleton.english@dowjones.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
June 02, 2023 11:59 ET (15:59 GMT)
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