Banks play a critical role in the financial system, providing everything from commercial loans to wealth management and payment processing services. Market leaders have certainly capitalized on rising interest rates and strong loan demand to boost profitability, helping fuel a 12.7% gain for the banking industry over the past six months. This performance has closely followed the S&P 500.
Although banks have produced good results, only a handful will thrive over the long term as fintech disruptors are rapidly taking market share from traditional institutions. With that said, here is one bank stock poised to generate sustainable market-beating returns and two we would avoid.
Two Bank Stocks to Sell:
Independent Bank (INDB)
Market Cap: $3.91 billion
Tracing its roots back to 1907 and serving as a financial cornerstone in New England for over a century, Independent Bank Corp. (NASDAQ: INDB) operates as the holding company for Rockland Trust, providing banking, investment, and financial services across Eastern Massachusetts and Rhode Island.
Why Does INDB Give Us Pause?
- Muted 3.4% annual tangible book value per share growth over the last two years shows its capital generation lagged behind its banking peers
- Capital generation will likely be soft over the next 12 months as Wall Street’s estimates imply tepid tangible book value per share growth of 7.6%
- Low return on equity reflects management’s struggle to allocate funds effectively
Independent Bank’s stock price of $82.43 implies a valuation ratio of 1.1x forward P/B. Read our free research report to see why you should think twice about including INDB in your portfolio.
Cullen/Frost Bankers (CFR)
Market Cap: $9.91 billion
Tracing its roots back to 1868 when it was founded during Texas's post-Civil War reconstruction era, Cullen/Frost Bankers (NYSE: CFR) operates Frost Bank, a Texas-based financial institution providing commercial and consumer banking, wealth management, and insurance services.
Why Is CFR Not Exciting?
- Sales trends were unexciting over the last two years as its 7.2% annual growth was below the typical banking company
- Earnings per share lagged its peers over the last two years as they only grew by 10.7% annually
- Tangible book value per share is projected to decrease by 5.9% over the next 12 months as capital generation weakens
Cullen/Frost Bankers is trading at $159.14 per share, or 2.2x forward P/B. To fully understand why you should be careful with CFR, check out our full research report (it’s free).
One Bank Stock to Buy:
Axos Financial (AX)
Market Cap: $5.25 billion
Originally founded as Bank of Internet USA in 1999 before rebranding in 2018, Axos Financial (NYSE: AX) is a diversified financial services company that provides digital banking, securities clearing, and investment advisory solutions to retail and business customers nationwide.
Why Is AX a Good Business?
- Annual net interest income growth of 18.3% over the past five years was outstanding, reflecting market share gains this cycle
- Strong performance of its loan book results in a best-in-class net interest margin of 4.8%
- Share repurchases over the last five years enabled its annual earnings per share growth of 18.8% to outpace its revenue gains
At $92.57 per share, Axos Financial trades at 1.4x forward P/B. Is now the right time to buy? Find out in our full research report, it’s free.
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