Banks play a critical role in the financial system, providing everything from commercial loans to wealth management and payment processing services. Furthermore, economic conditions have supported loan growth and fee income, a trend that has enabled the banking industry to return 8.6% over the past six months, almost identical to the S&P 500.
Nevertheless, investors should tread carefully as many banks are cyclical due to their exposure to credit risk and regulatory changes. Taking that into account, here is one bank stock poised to generate sustainable market-beating returns and two we’re passing on.
Two Bank Stocks to Sell:
Seacoast Banking (SBCF)
Market Cap: $3.17 billion
Founded during the Florida land boom of 1926 and surviving the Great Depression, Seacoast Banking Corporation of Florida (NASDAQ: SBCF) is a financial holding company that provides commercial and retail banking, wealth management, and mortgage services throughout Florida.
Why Are We Cautious About SBCF?
- Inferior net interest margin of 3.5% means it must compensate for lower profitability through increased loan originations
- Incremental sales over the last five years were less profitable as its earnings per share were flat while its revenue grew
- Tangible book value per share tumbled by 1.5% annually over the last five years, showing banking sector trends are working against it during this cycle
At $32.97 per share, Seacoast Banking trades at 1.2x forward P/B. If you’re considering SBCF for your portfolio, see our FREE research report to learn more.
Cathay General Bancorp (CATY)
Market Cap: $4.12 billion
Founded in 1962 with its first branch in Los Angeles' Chinatown, Cathay General Bancorp (NASDAQ: CATY) operates Cathay Bank, providing commercial banking services to businesses and individuals with a strong presence in Asian-American communities.
Why Is CATY Not Exciting?
- Annual net interest income growth of 6.5% over the last five years was below our standards for the banking sector
- Net interest margin of 3.2% reflects its high servicing and capital costs
- Incremental sales over the last two years were less profitable as its 1.1% annual earnings per share growth lagged its revenue gains
Cathay General Bancorp’s stock price of $61.39 implies a valuation ratio of 1.3x forward P/B. Check out our free in-depth research report to learn more about why CATY doesn’t pass our bar.
One Bank Stock to Watch:
UMB Financial (UMBF)
Market Cap: $10.84 billion
With roots dating back to 1913 and a name derived from "United Missouri Bank," UMB Financial (NASDAQ: UMBF) is a financial holding company that provides banking, asset management, and fund services to commercial, institutional, and individual customers.
Why Could UMBF Be a Winner?
- Annual net interest income growth of 21.6% over the last five years was superb and indicates its market share increased during this cycle
- Net interest margin increased by 75.2 basis points (100 basis points = 1 percentage point) over the last two years, giving the firm more capital to invest or return to shareholders
- Productivity and efficiency ratio profits are expected to increase next year as some fixed cost leverage kicks in
UMB Financial is trading at $142.75 per share, or 1.3x forward P/B. Is now the right time to buy? See for yourself in our in-depth research report, it’s free.
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