Banks use their capital and expertise to help businesses grow while offering consumers essential financial products like mortgages and credit cards. 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 6.7% gain has fallen behind the S&P 500’s 10% rise.
A cautious approach is imperative when dabbling in banks as many are sensitive to interest rate changes and economic cycles. With that said, here are three bank stocks we’re steering clear of.
Banc of California (BANC)
Market Cap: $2.98 billion
Originally established in 1941 and now operating with a tech-forward approach that includes its SmartStreet platform for homeowner associations, Banc of California (NYSE: BANC) is a California-based bank holding company that provides banking services to small and middle-market businesses, entrepreneurs, and individuals.
Why Do We Avoid BANC?
- Net interest income trends were unexciting over the last five years as its 2.5% annual growth was below the typical banking firm
- Expenses have increased as a percentage of revenue over the last five years as its efficiency ratio degraded by 17.2 percentage points
- Tangible book value per share tumbled by 3.1% annually over the last five years, showing banking sector trends are working against it during this cycle
Banc of California is trading at $19.36 per share, or 0.9x forward P/B. Read our free research report to see why you should think twice about including BANC in your portfolio.
WaFd Bank (WAFD)
Market Cap: $2.63 billion
Founded in 1917 and rebranded from Washington Federal in 2023, WaFd (NASDAQ: WAFD) is a bank holding company that provides lending, deposit services, and insurance through its Washington Federal Bank subsidiary across eight western states.
Why Are We Out on WAFD?
- 7.5% annual net interest income growth over the last five years was slower than its banking peers
- Inferior net interest margin of 2.6% means it must compensate for lower profitability through increased loan originations
- Performance over the past two years shows its incremental sales were much less profitable, as its earnings per share fell by 2.6% annually
WaFd Bank’s stock price of $35.59 implies a valuation ratio of 0.9x forward P/B. Check out our free in-depth research report to learn more about why WAFD doesn’t pass our bar.
Citigroup (C)
Market Cap: $230.5 billion
With operations in nearly 160 countries and a history dating back to 1812, Citigroup (NYSE: C) is a global financial services company that provides banking, investment, wealth management, and payment solutions to consumers, corporations, and governments.
Why Is C Not Exciting?
- The company has faced growth challenges as its 7% annual net interest income increases over the last five years fell short of other banking companies
- Earnings growth underperformed the sector average over the last five years as its EPS grew by just 2.5% annually
- Underwhelming 7.5% return on equity reflects management’s difficulties in finding profitable growth opportunities
At $135.03 per share, Citigroup trades at 1.1x forward P/B. If you’re considering C for your portfolio, see our FREE research report to learn more.
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