The banking crisis in March 2023 affected even the best bank stocks as higher interest rates put pressure on liquidity. With interest rates at 5% compared with March’s 4.75%, risks remain due to tighter lending standards and potentially higher yields.
Despite the Federal Reserve introducing a backstop mechanism after SVB Financial’s (OTCMKTS:SIVBQ) collapse, higher yields sent even the best bank stocks tumbling post-introduction. First Republic Bank collapsed post-introduction, whereas Signature Bank (OTCMKTS:SBNY) tumbled for reasons unrelated to higher yields, suggesting a cascading effect could still hurt even the best bank stocks.
While intended to prevent losses, the backstop has not eliminated vulnerability to higher yields. Although higher yields should not cause bank stocks to crumble, some bank stocks may still do exactly that. Today’s best bank stocks to buy to survive higher yields have attractive valuations as they have foregone short-term profits to build up provisions.
Here are the three best bank stocks to survive higher yields and remain well-positioned to weather a potential recession.
Comerica’s (NYSE:CMA) inclusion on this list may come as a surprise due to its large exposure to commercial real estate. However, its loan portfolio focuses on the less volatile pharmaceutical and healthcare sectors, especially manufacturing and not office spaces. This reduces vulnerability to the pressures of remote work and the labor market.
Moreover, Comerica’s primary business activities focus on Texas and California, regions experiencing well above-average growth in commercial loans.
Interestingly, the bank keeps paying an impressive dividend yield of 6.9% to attract investors, providing an income even if the stock price declines. Down 34% year-to-date, it appears undervalued compared to worse-off peers.
The bank has also set aside 13.5% of its market capital in provisions amounting to $736 million while enjoying a meager non-accrual rate of just 0.35%, indicating minimal losses compared to the industry average of around 2% and providing a fairly large safety net in case things turn sour. In fact, the credit loss allowance is 4.8x that of its non-accrual loans, nearly twice the year-ago figure.
PNC Financial Services (PNC)
PNC Financial Services (NYSE:PNC), one of the larger regional banks, faced significant problems during the March collapse. However, the bank’s stock has recovered somewhat recently, placing it down around 19% year-to-date. Interestingly, it is one of only a few banks offering a dividend yield of over 4%.
To survive higher yields, the bank has also set aside a substantial amount of provisions at $5.4 billion to cover non-performing assets and potential yield-driven losses. Despite representing a modest ratio of 10% of its equity, it still provides more than twice the coverage required for its current non-performing assets.
On another plus sign, the bank has also become quite popular among Wall Street analysts. All 29 analysts tracked by Yahoo Finance rank PNC as at least a hold, with an average price target of $135.96. The bank stock trades around $126, representing approximately 8% upside.
Truist Financial (TFC)
Truist Financial (NYSE:TFC) is the next best bank stock to buy to survive higher yields. It is considered relatively undervalued at an attractive price-to-earnings (P/E) ratio of 7.7x compared to the regional banks average of 13.5x. However, it enjoys a different level of optimism among analysts than PNC, as it lacks positive ratings from popular bank stock analysts. Even so, according to TipRanks, none of the 13 analysts that cover the stock have a sell rating.
The bank recently divested 80% of its Insurance division for $10 billion, allowing a focus on its core banking units and building a liquidity buffer. If borrowing costs rose, it would benefit from higher interest margins as it pivots into a pure-play bank in the southeast, a region with a relatively low unemployment rate.
Truist has set aside a whopping $5 billion to safeguard against potential losses from higher yields. Unlike others, it has limited exposure to commercial real estate, accounting for only 7% of its total loan portfolio.
While its provisions for non-accrual loans stand only at 3.2x, up from 3x in the previous quarter, it lags behind Comerica regarding the “safety net” for losses. Nevertheless, Truist is moving in the right direction to strengthen its position in the list of the best bank stocks to survive higher yields.
On the date of publication, Stavros Tousios 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.