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Citigroup is one of the two bank stocks that Barron’s finds most attractive.
Mario Tama / Getty Images
Bank stocks started strongly in 2021, but it is not too late for investors to find opportunities.
The sector has risen 12% this year, according to the KBW Bank Index (ticker: BKX), as creditors are expected to begin reporting their fourth quarter earnings.
JPMorgan Chase
(JPM),
Wells Fargo
(WFC), and
Citigroup
(C) will start things on Friday.
Bank shares had recovered sharply in the last two months of 2020, even before the recovery in the past two weeks. The holders of the shares were sprayed in March, but were delayed in November, when positive news about vaccines emerged and the election results raised hope that government spending would boost the economy.
Investors are looking for signs that the recovery may continue. They will want evidence that lenders have set aside enough money to cover potential loan losses and hope that some will discuss when the billions they have placed in reserves can be released for profit. Investors will also want to hear the bank CEOs’ assessment of how quickly the pandemic’s damage to the economy can be cured.
Although several bank shares have returned to pre-pandemic levels, some still have room to rise before they get there. Other banks may lag behind their peers based on the assessment.
Barron’s recently ran a screen of 64 of the largest banks based on price at tangible book value, return on equity and dividend yield, using data from Bloomberg. On average, we found that the cohort was being traded at 1.8 times the tangible book value. Next, we look for creditors who negotiate below that level with a history of delivering higher returns on equity.
(A table showing the results is below).
Based on this analysis and some qualitative data, we found six banks that can offer attractive opportunities. Two of the banks Barron’s identified are self-help stories that can represent the most attractive opportunities for investors.
Citigroup and Wells Fargo trade at 0.9 times the tangible book value and 1 time the tangible book value, respectively. Citigroup’s shares were particularly attacked at the end of last year, when the bank received a $ 400 million consent request from regulators for weaknesses in its risk management and internal controls. The bank was already working to improve these deficiencies; shares can benefit when Jane Fraser officially takes over as CEO next month.
Wells Fargo is in the midst of a multi-year effort to recover from its fake account scandal, which emerged in 2016. Under Chief Executive Charlie Scharf, who has been in office for just over a year, the bank is trying to cut costs and become more efficient. UBS analysts recently estimated that for every 1 percentage point drop in the bank’s efficiency ratio in 2022, profit before tax could increase by 3.8%.
Goldman Sachs
it was not hit as hard as other banks during the 2020 crisis. In fact, thanks to robust trading activity and closing deals in the second half of the year, the stock managed to gain. But even with its strength, Goldman is traded at 1.3 times the tangible book value. Capital market activity is expected to remain strong in 2021 and the bank plans to resume share repurchases this year, so Goldman’s shares still have some energy.
Fifth Third Bancorp
(FITB) also looks good in Barron’s screen, trading at 1.4 tangible book value. The bank is expected to benefit from cost reduction and share buyback initiatives, while currently offering a dividend yield of 3.4%.
Comerica
(CMA), trading 1.2 times the tangible book, while yielding 4.3%, can also provide an attractive opportunity for investors.
Finally, based in Columbus, Ga.
Synovus Financial,
trading 1.3 times the tangible book and yielding 3.5%, is another bank that investors will want to watch. Analysts at Keefe, Bruyette & Woods recently said the bank is a likely candidate for the merger, which could also be a catalyst for the shares.
Write to Carleton English at [email protected]