2 Undervalued Big Bank Stocks to Buy

Several large bank stocks, including Citigroup (C) and Bank of America (BAC), lowered guidance for second-quarter earnings due to lower noninterest revenues. Both bank stocks, however, exceeded consensus earnings expectations for the past quarter and could present upside for the next 12 months.

Both firms have underperformed the S&P 500 year-to-date and are trading at a discount relative to their sector and the S&P 500 on a price to book basis. Faster economic growth including housing market recovery and a stronger labor market might continue to drive loan growth at both large bank stocks.

Here’s a look at both:

Bank of America to Benefit Most From Wealth Management

Bank of America’s large banking client base provides opportunities for its Merrill Lynch wealth management arm to cross-sell investment products. During the past quarter, Bank of America reported over $1.13 trillion in deposit balances, an increase of 5% or $54 billion relative to last quarter. The bank stock also grew its credit card client base and provided more residential loans.

Favorable stock market performance bolstered wealth management revenues of $4.6 billion, and assets under management reached a record $2.47 trillion. Growth in wealth management, which comprises about 14% of Bank of America’s revenues, could continue if the bank is successful in cross-selling and investment banking revenues are also improving.

Bank of America is settling with authorities, putting legal troubles behind, and has contained non-litigation expenses by reducing headcount. Even though expenses could remain flat as the bank invests more in compliance and technology, its improved revenue stream from loans, wealth management and investment banking may enhance profitability and share value.

Citigroup’s Diverse Revenue and Efficiency Improve Outlook

Growth in core businesses together with declining expenses could boost Citigroup’s value over the next year.

Citigroup’s global market reach differentiates the bank and acts as a revenue diversifier. Citigroup grew its loan base by 4% over the past year to $668 billion, and its deposits improved by 3% over the same period. Citi Holdings, the subsidiary that holds non-core assets and is targeted to shrink, reduced its loans and deposits by 18% and 70%, respectively, year-over-year. Core expenses excluding legal fees and cost of credit declined 3% and 17%, respectively.

Last quarter, the bank announced a settlement $7 billion with the U.S. Department of Justice to resolve allegations against the back regarding alleged unfair practices in selling mortgage-backed securities and collateralized debt obligations. The bank has kept its efficiency ratio below 57% inclusive of restructuring charges and its adjusted efficiency ratio is 53.9%.

The stock is trading at 0.8 times book and is attractive relative to its peers and the overall market.

As of this writing, Ann Marie did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2014/07/large-bank-stocks-to-buy/.

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