MW 11 bank stocks trading at low valuations, even after Trump bump
By Philip van Doorn
JPMorgan Chase CFO doesn't want to buy back shares priced higher than twice tangible book value. Many bank stocks trade below that level.
Bank stocks have had quite a run following Donald Trump's election to a second term as president. But investors need to ask themselves whether or not some of stocks are trading too high. A screen of two U.S. bank indexes highlights 15 that are still priced relatively cheaply.
There are plenty of factors in banks' favor. The Federal Reserve has cut its target range for the federal-funds rate by 75 basis points over the past two months, to a range of 4.50% to 4.75%. Lower funding costs mean many banks will widen their net interest margins - the difference between the average interest rate they earn on loans and investments and what they pay for deposits and borrowings.
More on banks as funding costs decline: Schwab leads list of banks expected to profit most in 2025 from Fed's rate cuts
In an email exchange on Monday, Christopher Marinac, director of research at Janney Montgomery Scott, wrote that he and colleagues were "confident Banks' valuations should move higher from current prices," based on price-to-earnings and price-to-tangible-book ratios. He added that he expected banks' consensus earnings-per-share estimates to increase, which would "support higher stock prices."
Another important development for banks will be the new regulatory environment brought about by the incoming Trump administration.
Read: How Trump will transform banking regulation - even with Powell at the Fed
A bank-stock warning and a screen for value
The KBW Nasdaq Bank Index BKX is made up of 24 of the largest U.S. banks and is tracked by the Invesco KBW Bank ETF KBWB. The KBW Regional Banking Index XX:KRX is made up of 50 more U.S. banks and is tracked by the Invesco KBW Regional Banking ETF KBWR.
Here are price changes and weighted forward price-to-earnings ratios for the two bank exchange-traded funds and for the SPDR S&P 500 ETF Trust SPY, which tracks the S&P 500 SPX:
ETF Price change from Nov. 4 through Nov. 11 2024 price change Forward P/E Forward P/E to 5-year average
Invesco KBW Bank ETF 12.2% 40.9% 13.0 120%
Invesco KBW Regional Banking ETF 15.7% 21.9% 14.4 123%
SPDR S&P 500 ETF Trust 5.1% 26.0% 22.3 114%
Source: FactSet
These price changes exclude dividends. The forward P/E ratios look high for all three relative to their five-year averages. The bank ETFs' discounted P/E ratios relative to that of SPY (and to the S&P 500 itself) are typical.
For banks, another standard valuation measure is the price-to-tangible book ratio. A bank's tangible book value is its book value less intangible assets, such as goodwill (the carried premium paid for acquisitions, which can be written-down later) and loan-servicing rights.
And herein lies the warning about bank-stock valuations. Large U.S. banks have been buying back significant amounts of stock to lower their share counts and increase earnings per share. But during JPMorgan Chase & Co.'s $(JPM)$ quarterly earnings conference call on Oct. 11, the bank's chief financial officer, Jeremy Barnum, said that "buying stock back at more than two times tangible book value is not necessarily the best thing to do, because we think we'll have better opportunities to redeploy it or to buy back at cheaper prices at one point."
So we screened the 24 banks in the KBW Nasdaq Bank Index and the 50 in the KBW Regional Banking Index to isolate those trading at or below 1.9 times tangible book value and at forward P/E ratios at or below 12.0.
This left us with 11 banks. Here they are, sorted by ascending price/tangible book ratio:
Bank Ticker City Price/ tangible book Forward P/E Dividend yield $Citigroup Inc(C-N)$. C New York 0.8 9.9 3.21% Valley National Bancorp VLY Morristown, N.J. 1.1 11.6 4.30% Bank OZK OZK Little Rock, Ark. 1.2 8.2 3.38% Popular Inc. BPOP San Juan, Puerto Rico 1.4 10.0 2.55% Truist Financial Corp. TFC Charlotte, N.C. 1.5 12.0 4.48% Hancock Whitney Corp. HWC Gulfport, Miss. 1.6 11.7 2.66% Provident Financial Services Inc. PFS Jersey City, N.J. 1.6 10.4 4.39% F.N.B. Corp. FNB Pittsburgh 1.6 11.9 2.86% Columbia Banking System Inc. COLB Tacoma, Wash. 1.8 11.7 4.57% Western Alliance Bancorp. WAL Phoenix 1.8 10.7 1.63% Webster Financial Corp. WBS Stamford, Conn. 1.8 10.6 2.67% Source: FactSet
Citigroup Inc. (C) trades at the lowest price/tangible book ratio on the list - it is the only one trading below tangible book value. Citi has the second-lowest forward P/E on the list, after Bank OZK $(OZK)$.
Leaving the 11 banks in the same order, here is a summary of opinion among analysts polled by FactSet:
Bank Ticker Share buy ratings Share neutral ratings Share sell ratings Nov. 11 price Consensus price target Implied 12-month upside potential Citigroup Inc. C 71% 29% 0% $69.80 $76.42 9% Valley National Bancorp VLY 36% 64% 0% $10.24 $10.60 4% Bank OZK OZK 20% 60% 20% $48.57 $48.44 0% Popular Inc. BPOP 67% 33% 0% $97.31 $103.44 6% Truist Financial Corp. TFC 45% 55% 0% $46.44 $47.34 2% Hancock Whitney Corp. HWC 67% 33% 0% $60.25 $60.53 0% Provident Financial Services Inc. PFS 80% 20% 0% $21.86 $22.80 4% F.N.B. Corp. FNB 88% 12% 0% $16.77 $17.25 3% Columbia Banking System Inc. COLB 25% 75% 0% $31.50 $31.50 0% Western Alliance Bancorp. WAL 93% 7% 0% $93.39 $100.20 7% Webster Financial Corp. WBS 80% 20% 0% $59.97 $61.60 3% Source: FactSet
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Don't miss: JPMorgan may be 'best in class,' but it's time to take profits, analyst says
-Philip van Doorn
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November 12, 2024 09:36 ET (14:36 GMT)
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