Banks serve as the backbone of the economy, facilitating lending, deposits, and financial services that keep businesses and consumers moving forward. Still, investors are uneasy as banks face challenges from credit quality concerns and potential regulatory changes. These doubts have certainly contributed to banking stocks’ recent underperformance - over the past six months, the industry’s 8.2% gain has fallen behind the S&P 500’s 13.1% rise.
A cautious approach is imperative when dabbling in banks as many are sensitive to interest rate changes and economic cycles. Keeping that in mind, here are three bank stocks we’re passing on.
M&T Bank (MTB)
Market Cap: $36.57 billion
Tracing its roots back to 1856 when it was founded as Manufacturers and Traders Bank in Buffalo, New York, M&T Bank (NYSE: MTB) is a regional bank holding company that provides retail and commercial banking, trust, wealth management, and investment services to consumers and businesses.
Why Do We Think Twice About MTB?
- Sales trends were unexciting over the last two years as its 3.8% annual growth was below the typical banking company
- Estimated net interest income growth of 3.2% for the next 12 months implies demand will slow from its five-year trend
- Anticipated tangible book value per share growth of 8.2% for the next year implies profitability will be modest
M&T Bank is trading at $253.32 per share, or 1.4x forward P/B. Check out our free in-depth research report to learn more about why MTB doesn’t pass our bar.
JPMorgan Chase (JPM)
Market Cap: $965.2 billion
Tracing its roots back to 1799 when its earliest predecessor was founded by Aaron Burr, JPMorgan Chase (NYSE: JPM) is a leading financial services company offering investment banking, consumer banking, commercial banking, and asset management services globally.
Why Is JPM Not Exciting?
- Annual sales growth of 7.8% over the last two years lagged behind its banking peers as its large revenue base made it difficult to generate incremental demand
- Net interest margin of 2.5% is well below other banks, signaling its loans aren’t very profitable
- Anticipated 2.4 percentage point rise in its efficiency ratio suggests its expenses will increase as a percentage of revenue
At $363.25 per share, JPMorgan Chase trades at 2.7x forward P/B. To fully understand why you should be careful with JPM, check out our full research report (it’s free).
Wells Fargo (WFC)
Market Cap: $266.4 billion
Founded during the California Gold Rush in 1852 to provide banking and express delivery services to miners and merchants, Wells Fargo (NYSE: WFC) is a diversified financial services company that provides banking, lending, investment, and wealth management services to individuals and businesses.
Why Are We Bearish on WFC?
- The company has faced growth challenges as its 6% annual net interest income increases over the last five years fell short of other banking companies
- 33.6 basis point (100 basis points = 1 percentage point) decline in its net interest margin over the last two years reflects the firm’s willingness to accept lower profitability to defend its market position
- Estimated tangible book value per share growth of 7.9% for the next 12 months is soft and implies weaker profitability
Wells Fargo’s stock price of $88.17 implies a valuation ratio of 1.6x forward P/B. Dive into our free research report to see why there are better opportunities than WFC.
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