This year has been tough on regional bank stocks, with borrowing costs soaring and cutting into net interest income. Additionally, higher yields diminished older bonds’ value and heightened internal credit risks — just ask the (now defunct) Silicon Valley Bank. These factors and others contribute to a string of poor regional bank performance indicators that, practically speaking, trickle upward across the entire banking and financial sector. The SPDR S&P Bank ETF (NYSEARCA:KBE) is down 3% this year, with few signs of recovery moving forward.
Though the broader market shows signs of recovery, bank stocks will likely take longer to adjust. This delay presents a significant opportunity for investors. Smaller and regional banks, often seen as high-yield opportunities, are typically hit hardest by bearish sentiment and tend to sell off more quickly, also taking longer to recover.
All bad news, right? Not so fast. For many of these high-quality regional bank stocks, the bottom is in. Priced well below book value in all cases, these undervalued and cheap regional bank stocks offer upside potential as market forces stabilize, even if slowly, but the kicker is their dividend yield. With low pricing and high yield, you can dollar-cost average into your regional bank stocks on autopilot, and reap rewards when the sector starts recovering.
Citizens Financial Group (CFG)
Citizens Financial Group (NYSE:CFG) is one of the largest regional banks and arguably the best-value bank stock available today. Based in Rhode Island, Citizens Financial offers a price-to-book ratio of just 0.72 alongside a forward dividend yield just shy of 5%. When including buybacks, its total yield escalates to over 10%.
Separated from the Royal Bank of Scotland (NYSE:RBS) in 2015, CFG has successfully navigated away from the financial challenges that followed the 2008 crisis. The bank’s strategic realignment has since positioned it on a path of success, with its management drawing on past experiences to navigate current economic challenges effectively.
Additionally, Citizens Financial benefits from a robust economic recovery in its primary market. Rhode Island’s 2023 labor market was one of the strongest in the nation, breaking below 3% for the first time since 1988. Given its focus on mid-market lending, this economic vitality is particularly advantageous for Citizens Financial. The positive business climate in Rhode Island promises strong support for CFG’s operational outlook, making it an top option for investors looking for regional bank stocks.
KeyCorp (KEY)
KeyCorp (NYSE:KEY) specializes in middle-market commercial banking across Ohio and New York, positioning it as an ideal inexpensive bank stock to leverage a rapidly expanding economic segment. Thanks to the interest income generated from these commercial loans, KeyCorp boasts an impressive 5.9% dividend yield. Furthermore, after enduring a challenging period earlier in the year, Morningstar currently estimates KeyCorp’s fair per-share value to be nearly 40% higher than its present trading price, underscoring its strength among undervalued bank stocks.
Asset management firm Diamond Hill Capital Management recently summarized their bull case on KeyCorp moving forward, saying that the stock will likely “generate improved returns and tangible book value growth as net interest margins expand and Treasurys on its balance sheet mature [alongside] positive loan growth following a period of balance sheet optimization.” That’s a fairly ringing endorsement, considering Diamond Hill identified just two new investment opportunities among large-cap stocks in 2024’s first quarter: Sysco Corporation (NYSE:SYY) and KeyCorp.
Valley National Bancorp (VLY)
If you’re searching for regional bank stocks with unique growth potential, this bank offers a compelling 6.7% dividend yield and unique access to the burgeoning cannabis market. Better yet, Valley National Bancorp (NYSE:VLY) stands out as one of the most affordable regional bank stocks, trading at just 0.57 times book value and 7.75 times earnings, making it both undervalued and frequently overlooked. The bank boasts a robust balance sheet with a low debt-to-equity ratio of 0.56, well below the industry average of 1.2, underscoring its minimal leverage compared to its peers. Its recent stock buyback program and a dividend yield that surpasses Treasury Bills further underscore its financial stability.
Analysts largely view Valley National as undervalued, setting an average price target of $9.44—approximately 31% above its current share price. Additionally, the sentiment around the bank’s stock is improving significantly, with 44% of analysts now recommending a “hold,” reflecting a 300% positive shift in sentiment from the previous evaluation period. This makes Valley National a promising candidate for those seeking stable retirement investments.
On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
