Financial stocks haven’t enjoyed the same rally as tech stocks in 2023. Rising interest rates, a weakened consumer, and worries about a chain reaction of regional bank collapses contributed to these stocks falling behind. This has led to the rise of undervalued bank stocks.
The Financial Select Sector SPDR Fund (NYSEARCA:XLF) is only up by 2% year-to-date. That’s well below the returns from the S&P 500 and Nasdaq 100 during the same time frame.
While bank stocks have traded differently based on underlying fundamentals, almost all of them took a dive at the start of March. It was a frightening month for the industry, as Silicon Valley Bank failed after a bank run on March 10, 2023.
While a few savvy investors had reasons to worry about Silicon Valley Bank, it came as an overnight surprise for many consumers. There wasn’t a dramatic build-up in the media that tracked the company’s wearing balance sheet.
Silicon Valley Bank’s collapse revealed flaws in the banking industry. The firm went under in large part because its long-term government bonds lost value from rising interest rates. Many banks sit on long-term debt that has lost value from rising interest rates. If banks had to sell those bonds to repay depositors, it could create a chain reaction.
This fear resulted in sharp corrections within the banking industry, but not every stock deserved to take a hit. These three undervalued banking stocks now look like buying opportunities on the heels of the banking crisis.
JPMorgan (NYSE:JPM) is the largest bank by assets under management in the United States. The conglomerate has been around for well over a century and continues to report good revenue and earnings.
Although the company’s deposits were down year-over-year, that’s a reflection of regional banks’ incentives. Regional banks have to set higher interest rates for their savings accounts and certificates of deposit to bring in more depositors. JPMorgan doesn’t have to elevate its rates to the same degree, allowing them to minimize losses.
Shares are up by 35% over the past five years and currently have a 2.50% dividend yield. The company has raised its quarterly dividend substantially from $0.56 per share in 2018 to $1 per share in 2023. The company recently announced it would raise its quarterly dividend to $1.05 per share in the third quarter, marking a 5% year-over-year improvement.
Bank of America (BAC)
Bank of America (NYSE:BAC) has many of the same catalysts as JPMorgan. It’s the second-largest bank by assets under management and took an unnecessary drop during the regional bank crisis. Shares are still down by roughly 6% compared to when the crisis started, and yet that event helped Bank of America. This makes it one of those undervalued bank stocks to buy.
The financial firm received $15 billion in deposits within days of Silicon Valley Bank’s collapse. Those extra deposits came from people who wanted to put their money into a safer bank that was less susceptible to a bank run.
Shares are down by roughly 4% year-to-date because of the regional banking crisis. Bank of America shares should return to their levels before the news hit. The company is actually in a better position due to the regional banking crisis, and any future defaults can further consolidate money into the financial firm.
Revenue and earnings are both up year-over-year in the second quarter. While investors wait for shares to bounce back, they get to enjoy a 3% dividend yield. The quarterly dividend went from $0.15 per share in 2018 to $0.24 per share this year.
Investors don’t have to restrict themselves to traditional banks to find undervalued stocks. SoFi (NASDAQ:SOFI) is a high-growth fintech company that stands to benefit from the return of student loan payments.
Even without the student loan payments, SoFi is making a comeback. The fintech firm comfortably beat expectations and reported 37% year-over-year revenue growth. Strong demand for personal loan originations contributed to the company’s strong revenue beat.
The company has been unprofitable, but leadership expects to post a profit in the 4th quarter. Deposits surged by 26% to $12.7 billion, and the company now has over 6.2 million users. That represents a 44% year-over-year growth in the number of people who use SoFi.
SoFi is on the comeback trail and has more than doubled year-over-year. High growth rates and a switch to profitability can lead to promising long-term returns for investors. It’s definitely one of those undervalued bank stocks to pay attention to.
On this date of publication, Marc Guberti did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.