The banking sector is a key component of our economy. Therefore, bank stocks get significant investor attention.
Financial names, which are mostly cyclical in nature, have lately slumped as a result of several factors, such as question marks over the slowing pace of economic recovery and uncertainty in interest rates.
For financial institutions, changes in interest rates matter a great deal. Commercial banks earn revenue from loans and other interest-earning assets. On the other side of the equation, banks pay interest on client deposits as well as other interest-bearing liabilities.
When we look at a bank’s balance sheet, we can arrive at the net interest income by deducting interest paid from the total interest earned. Put another way, banking stocks will likely be affected by the interest rate decision of the Fed in the coming months.
In September, profit taking put pressure on many bank stocks. So far in the month, the Dow Jones U.S. Banks Index is down about 8%. However, the index is still up about 60% in the past 12 months.
We can expect Wall Street to monitor the health of the banking sector closely as we approach the last quarter of the year. Meanwhile, declines in bank stocks, which are also known for robust dividends, are creating opportunities for long-term investors.
With that information, here are three financial stocks that deserve your attention now:
Bank Stocks to Buy: Citigroup (C)
52-week range: $40.49 – $80.29
Dividend yield: 2.9%
Citigroup offers a broad range of financial services under two segments: global consumer banking and institutional clients group. The financial heavyweight currently has around 200 million customer accounts in more than 160 countries.
Management reported second quarter financial results in mid-July. Revenues of $17.5 billion showed a decline of 12% from last year. Citigroup cited decreased revenue from fixed income markets within its institutional clients group as well as fewer card loans in global consumer banking. Low interest rates have been affecting revenues.
During the quarter, net income came in at $6.2 billion, or $2.85 per diluted share compared to last year’s $1.1 billion and 38 cents, respectively.
“The pace of the global recovery is exceeding earlier expectations and with it, consumer and corporate confidence is rising,” CEO Jane Fraser said. “… During the first half of the year, we returned nearly $7 billion in capital to our shareholders, the most that was permitted by the Federal Reserve.”
The global bank is exiting consumer businesses in 13 markets across Asia as well as Europe, Middle East and Africa. The group will, instead, focus more on serving high net worth clients in these regions.
C stock returned more than 8% so far in 2021. The stock currently trades at 8.8x consensus forward price-earnings and 2x current sales. The company’s price-book ratio stands at 0.7. Given the current metrics and growth opportunities in a post-pandemic recovery, interested readers could buying the dips in Citibank stock.
US Bancorp (USB)
52-week range: $34.17 – $62.47
Dividend yield: 3.2%
Minnesota-based US Bancorp operates consumer, business, corporate and commercial banking, wealth management and investment services. It has nearly 70,000 employees and $559 billion in assets.
According to second quarter financial results released in mid-July, total revenue came in at $5.8 billion, down 1% compared to prior-year period. Net income of $2 billion translated into diluted earnings per share of $1.28. A year ago, net income and EPS stood at $689 million and 41 cents.
Following the announcement, CEO Andy Cecere commented, “As we head into the second half of 2021, we are well positioned to benefit from improving economic conditions; however, we are even more excited about the significant secular growth opportunities we see driving industry leading returns over the longer term.”
In August, US Bancorp announced the intention to acquire the financial technology (fintech) company Bento Technologies. Management wants to offer a simpler money management service for small businesses. Also, the bank recently received $65 million in tax credit allocations from the Treasury Department.
So far this year, USB stock is up about 22%. The shares trade at 12.6x consensus forward earnings and 3.7x current sales. The company’s price-book ratio is 1.8. Buy-and-hold investors should consider investing if the price drops below $55 to increase the margin of safety.
Bank Stocks to Buy: Wells Fargo (WFC)
52-week range: $20.76 – $51.41
Dividend yield: 1.7%
Wells Fargo offers consumer banking, commercial banking, corporate banking and wealth management services. The company has around $1.9 trillion in assets.
Second quarter metrics, issued on July 14, indicated total revenue of $20.3 billion, up 10.8% from last year. Net income was $6 billion, or $1.38 per diluted share compared to a net loss of $3.8 million, or $1.01 per diluted share in previous-year quarter.
“Credit quality continued to be exceptionally strong,” CEO Charlie Scharf said, “Our results included a $1.6 billion pre-tax reduction in the allowance for credit losses, and charge-offs continued to decline. While we expect charge-offs will increase at some point, we continue to see strong trends in all of our businesses.”
WFC stock is up close to 52% so far this year. The shares trade at 13.2x current sales. The price-book ratio stands at 1.1. The bank increased its next dividend by 10 cents per share, doubling from 10 cents to 20 cents. Bullish investors should keep the stock on their radar with a view to invest around $42, or even below.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.