The bank’s shares have a strong start to 2021 but investors are not late in finding opportunities.
According to the KBW Bank Index (ticker: BKX), the sector is up 12% this year, as lenders begin reporting their fourth quarter earnings.
(C) will close things on Friday.
The last two weeks saw rally in bank shares in the last two months of 2020, before the rally. Those holding the shares were endangered in March, but repurchased in November as positive news about vaccines surfaced and election results raised hopes for government spending to propel the economy.
Investors will be looking for signs that may continue upselling. They want evidence that lenders have earmarked enough money to cover potential debt losses, and would hope that some would discuss when the billions they put into reserves could be released into earnings. Investors would also like to hear the bank’s CEO assess how quickly the epidemic damage in the economy can be recovered.
While many bank stocks have returned to their pre-epidemic levels, some still have room to rise before reaching there. Other banks may lag behind their peers on valuation basis.
Baron’s Most recently screened 64 of the largest banks based on tangible book value, return on equity and dividend yield, using Bloomberg data. On average, we found that the cohort was trading at 1.8 times tangible book value. We then looked for lenders below that level who have a history of offering high returns on equity.
(A table showing the results is below.)
Based on this analysis and some qualitative data, we found six banks that could provide compelling opportunities. Of two banks Baron’s There are identified self-help stories that may represent the most compelling opportunities for investors.
Citigroup and Wells Fargo trade at 0.9 times tangible book value and 1 times tangible book value, respectively. Citigroup’s shares were particularly beaten 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 was already working to rectify those deficiencies; The stock could benefit if Jane Fraser officially takes over as CEO next month.
Wells Fargo is in the midst of a multilateral effort to recover from its fake-accounts scandal, which surfaced in 2016. Under chief executive Charlie Scharf, who has been in the role for more than a year, the bank wants to cut costs and become more efficient. UBS analysts recently estimated that with every 1 percentage-point decrease in the bank’s 2022 efficiency ratio, pretax earnings could rise 3.8%.
Like the other banks were not hit nearly as hard during the 2020 recession. In fact, thanks to strong trading and deal making activity in the last part of the year, the stock has been able to generate profits. But even with its strength, Goldman trades at 1.3 times tangible book value. Capital market activity is expected to remain strong in 2021 and the bank plans to resume share repurchases this year, so Goldman’s stock still has some juice.
Fifth Third Bancorp
(FITB) sounds good too Baron’s Screen, trading at 1.4 tangible book value. The bank is expected to benefit from the cost savings initiative currently offering a 3.4% dividend yield and share repurchase.
(CMA), trading at 1.2 times tangible book yielding 4.3%, can also provide an attractive opportunity for investors.
Finally, Columbus, Ga.-based
Trading on a 1.3 times tangible book and yielding 3.5%, is another bank investors want to see. Analysts at Keefe, Brewett and Woods recently said the bank is a potential merger candidate, which could also be a catalyst for the stock.
Write Carlton English at [email protected]