Bank stocks got off to a rocky start this year, with the KBW Bank index falling more than 13 percent in January.
Investors fled the financial sector after softer-than-expected economic data suggested that the U.S. Federal Reserve may not continue to raise interest rates this year and while worries about banks’ exposure to the energy sector weighed on sentiment.
However, market fears are overdone, and re-entering the sector now could prove lucrative, with many of the nation’s largest banks trading at a steep discount.
Here’s a look at three big banks whose current valuations make them bargain buys.
Bargain Bank Stocks: Bank of America Corp (BAC)
Bank of America Corp (BAC) suffered its fair share of turmoil in the years following the financial crisis. However, the company appears to have left the worst of its legal troubles in the past and has emerged a stronger, more solid bank.
Despite that, the company’s price-to-book value ratio is just 0.54 — meaning that even if the bank went under and its assets were divided, investors could still make a profit.
Not only that, but analysts are expecting to see Bank of America grow its earnings at an average annual pace of 9.5% over the next five years.
Shares of BAC also have the potential to rise in the coming year as the company’s significantly lower legal fees have freed up excess cash to invest in the future. Rumor has it that the bank is planning to incorporate Apple Pay from Apple Inc. (AAPL), as well as near field communication, into its ATMs.
The new technology is expected to cut down on fraudulent withdrawals and in turn save Bank of America from eating those costs.
Bargain Bank Stocks: JP Morgan Chase & Co (JPM)
JP Morgan Chase & Co (JPM) is another bank whose sub-$60 share price doesn’t do it justice. The company’s price-to-book value is not as low as Bank of America’s at 0.94, but the market is underestimating the bank’s potential nevertheless.
For one thing, JP Morgan is more than just a traditional bank — the company runs a valuable asset management arm that is likely to prosper in the year ahead. The firm is performing well in 2016, with analysts forecasting an earnings increase of 7.08% in 2016.
One of the reasons that shares of JPM are struggling is investors’ concern about the bank’s exposure to the energy market. Big banks have been keeping oil companies afloat with lines of credit as the commodity continues to lose value. Many worry that defaults are on the horizon and that banks will suffer, but JP Morgan Chase’s exposure to that sector is limited. Sixty percent of the firm’s energy sector loans went to investment-grade companies and even in the worst case scenario, the company has projected losses of $750 million, still a fraction of its profits.
The company also poses an opportunity for income investors, as it pays out a 3% dividend yield.
Bargain Bank Stocks: Wells Fargo & Co (WFC)
Wells Fargo & Co (WFC) is a play for investors who want to risk investing in the financial sector even though it has been widely abandoned, but also want to take minimal risk in doing so.
The bank has made a name for itself as one of the most conservatively run financial institutions in the country, so its shares typically trade at a premium in comparison to its peers. One of the reasons investors love this bank is its ultra-low efficiency ratio, meaning that the firm’s expenses eat up a significantly smaller portion of its revenue than is the norm for the industry.
Because the bank runs such a tight ship, the firm’s loans tend to be more secure and its balance sheet more stable. For that reason, WFC has the potential to trade much higher this year, as the bank is likely to do very well on the Federal Reserve’s upcoming stress tests.
Not only that, but the bank’s conservative nature makes it a better option for investors who are worried about another collapse in the financial sector.
So far this year, Wells Fargo shares have lost more than 11% to trade below $50 — a sizable discount. The company is expected to grow its earnings at an average annual rate of 8.8% over the next five years, and the firm’s 3.1% dividend yield makes the case to buy even sweeter.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
