Global conflict and rising interest rates in the U.S. are creating undervalued bank stocks.
Citigroup (C) is in the news this week for a snafu in Europe, but that shouldn’t hurt C stock in the long-term.
JPMorgan Chase & Co. (JPM) is the largest of the U.S. big bank stocks.
Bank of America (BAC) had a solid earnings report and managed to avoid some of the losses seen by its peers.
Stock market digital graph chart on LED display concept. A large display of daily stock market price and quotation.
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When interest rates are on the rise, bank stocks become a great buy. That’s because of what’s known as net interest margin, which is the difference between the interest that banks earn on assets and the interest paid to depositors and creditors. When the Federal Reserve raises interest rates as its doing this year, the net interest margin also increases. Banks make more money.
“Basically banks are in the business of buying and selling money. It’s a very pure business and so the rates, the spread between what they borrow or your savings rate and what they lend, your lending rate is how they make their money,” said Motley Fool contributor Lou Whiteman on an Apr. 11 podcast. “Almost universally, the rates on the lending side go up first, so the banks in a typical time have a real chance in a rising interest rate environment.”
A lot of investors already know this, of course. So, the trick today is to find undervalued bank stocks that still have plenty of room to run in a rising interest rate environment. For this exercise, I screened for diversified banking stocks with a forward price-to-earnings (PE) ratio of 10 or less. Forward PE is one of the best indicators of value when evaluating stocks.
Because we want to get some extra bang for our buck, I also limited the screen to bank stocks that offer a dividend yield of at least 2%. And finally, I chose bank stocks that have a consensus analyst rating of “hold” or better.
Each of these names have seen double-digit losses so far this year. But there are plenty of reasons to like these undervalued bank stocks. Here are the top three undervalued bank stocks to buy now:
The logo for Citigroup (C) can be seen on the side of an office building for the company.
Source: Willy Barton / Shutterstock.com
Forward PE: 67.47
Dividend yield: 3.91%
Citigroup (NYSE:C) traces its roots all the way back to 1812 and the City Bank of New York. Now it’s a global bank serving hundreds of cities and countries with a market capitalization of nearly $100 billion.
Usually, Citigroup has a pretty low-key reputation, although it made some unwelcome news this week when it acknowledged a “large erroneous transaction” by someone on its London trading desk triggered a flash crash by as much as 8% on some European stocks. The mistake wiped out $315 billion in market capitalization before the stocks recovered.
But that’s not a reason to avoid C stock. For the first quarter (Q1) of the year, Citigroup announced that it beat analysts’ expectations for both profit and revenue. It posted revenue of $19.19 billion versus analysts’ expectations of $18.15 billion. And it earned $2.02 per share versus expectations of $1.55 per share.
The company is also planning to sell its consumer and commercial banking business in Russia, which would eliminate the bank’s exposure to that country. Citi had previously announced it was setting aside $1.9 billion for potential loan losses related to Russia and the country’s war in Ukraine.
JPMorgan Chase & Co. (JPM)
A sign for JP Morgan Chase & Co (JPM).
Source: Bjorn Bakstad / Shutterstock.com
Forward PE: 9.06
Dividend yield: 3.23%
While Citigroup has a comparably low profile, you can’t say the same about JPMorgan Chase & Co. (NYSE:JPM) and its Chief Executive Officer (CEO) Jamie Dimon. Called “the world’s most powerful banker” and “one of the most charismatic leaders in the United States” by CEOWorld Magazine, Dimon has been leading JPMorgan since 2005.
The largest of the big American banks with a market capitalization of $358 billion, JPM posted Q1 revenue of $31.59 billion, beating analysts’ estimates of $30.86 billion. Earnings per share (EPS) came in at $2.76 versus expectations of $2.69 EPS.
But those numbers were far below what JPM posted a year ago. The bank said its profits were down 42% and revenue was down 5%. Officials attributed the loss to the war in Ukraine and increased costs for bad loans.
“We remain optimistic on the economy, at least for the short term – consumer and business balance sheets as well as consumer spending remain at healthy levels – but see significant geopolitical and economic challenges ahead due to high inflation, supply chain issues and the war in Ukraine,” Dimon said.
All that has pushed JPM stock down more than 20% so far this year, but it probably won’t be there for long. Oppenheimer analyst Chris Kotowski recently upgraded JPM stock from “perform” to “outperform” and says the stock has at least 30% upside.
Undervalued Bank Stocks: Bank of America (BAC)
Forward PE: 910.52
Dividend yield: 2.24%
Like Citigroup, Bank of America (NYSE:BAC) stock is down roughly 16% so far this year. But unlike JPMorgan, Bank of America had a relatively solid earnings report for Q1 that was seen as strong.
Bank of America posted revenue of $23.2 billion, beating analysts’ expectations for $23.1 billion. EPS came in at 80 cents per share, which was better than the 75 cents EPS that analysts had expected. And while JPM reported a 42% drop in income from the previous year, Bank of America said it only had a 12% drop in the same period to $7.1 billion.
“Our strong first quarter client activity drove results that allow us to deliver for shareholders while continuing to invest in our people, businesses, and communities,” CEO Brian Moynihan said.
Wells Fargo (NYSE:WFC) analyst Mike Mayo said that Bank of America’s credit operations are close to a record low, which helped it beat analyst expectations. “The BAC story is about Main St. banking (strong) vs. Wall St. banking (weak),” he wrote in a research note.
On the date of publication, Patrick Sanders did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
