Bank stocks have had a difficult year, and things aren’t looking much brighter in the next few months either. From the regional banking crisis earlier this year to stress in the commercial real estate market, to the threat of a deeper than expected recession, banks have been stuck between a rock and a hard place. While some have benefitted from rising interest rates, most have simply suffered as the macroeconomic backdrop darkened.
However it could be time to warm to the sector, with most of the negativity more-or-less priced in. There’s no question banks will have to weather a storm as the cost of living crisis persists, but most investors have made peace with that eventuality. With that in mind, there are some bargains to be had and investors with a long-term horizon have the opportunity to pick up strong names while their valuations are depressed. But there are still some ticking time bombs out there to be mindful of.
When it comes to the large cap banks, diversity tends to offer enough insulation. But investors should be mindful of which banks are in a position to weather the storm, and which will be battered and bruised on the other side. The smaller names are much more at risk, so investors need to look for names that have strong balance sheets and steady revenue streams. If they’re heading into the storm with a faulty boat, you can be pretty sure they’ll be worse-off on the other side.
Zions Bancorp (ZION)
Zions Bancorp (NASDAQ:ZION) is still trying to shake off the damage from the Silicon Valley Bank (OTCMKTS:SIVBQ) drama earlier this year. Unfortunately, Zion’s performance since the incident hasn’t been enough to calm investors’ liquidity worries still looming large in the background. The group recently revised down its net interest margins expectations, a key profitability measure for banks.
Much of that is out of Zions’ control and in the Fed’s hands, though. If interest rates remain high, that will continue to put pressure on the entire sector. But Zions is in a unique position because part of its strategy hinges on upgrading its technology. That means there are very few levers to pull when it comes to cost cutting, which could be a problem if the macroeconomic backdrop worsens in the months ahead. Zions could find itself in a precarious position that some of its healthier peers can avoid.
First Horizon (FHN)
2023 went from bad to worse for First Horizon (NYSE:FHN), as bank stocks tumbled thanks to the banking crisis. Then, later when TD Bank (NYSE:TD) left the bank high and dry following an acquisition attempt. This shined a spotlight on the lack of underlying shareholder value that the bank offers.
Without the TD merger to get excited about, shareholders had to take a bleak look at what was on offer. Being a regional bank comes with an additional layer of risk, especially following the SBV incident. The Fed’s likelihood to be heavy handed to try to shore up the system is bad news for First Horizon. Plus, the threat of an economic downturn continues to loom. This will leave First Horizon exposed with cost cutting one of the life rafts to cling on to.
At first glance, KeyCorp (NYSE:KEY) might look like a stellar deal among bank stocks. Its 7.62% dividend yield makes it the kind of financial services stock one might think would help beat inflation. But KeyCorp’s deflated share price is well deserved, and it’s hard to imagine a quick turnaround for the bank.
The most recent earnings report showed revenue is down about 50% YoY with a 10% deflated quarterly share price. Efficiency (read: cost cutting) is the name of the game for the bank right now as it looks to put its feet on stable ground. But that’s not a long-term strategy. And importantly the bank’s wide footprint means that it will be difficult to rely on even in the short term. All told, Key still has further to fall before it can be considered a good value purchase.
On the date of publication, Marie Brodbeck did not hold (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.