Stocks to buy

The 3 Most Undervalued Bank Stocks to Buy Now: August 2023

If you’re a value investor looking for great businesses with cheap valuations, look no further than the banking sector in the United States. In early spring, the sector had been hit hard by a wave of awe-inducing bank failures. In particular, the sequential collapses of Signature Bank, Silicon Valley Bank and First Republic Bank triggered a panic among depositors and regulators. They then scrambled to prevent a systemic contagion. The crisis was, in part, facilitated by the U.S. Federal Reserve hiking interest rates as quickly as it did, which devalued the treasury bonds-holdings held on the balance sheets of many banks. However, a lack of proper risk management at the related institutions also played a significant role, making some bank stocks look lucrative.

Ultimately, the crisis also exposed the wider vulnerability of banks that had invested heavily in long-term treasury bonds, which lost value as interest rates rose sharply in response to inflationary pressures. To make matters worse, Moody’s, one of the leading credit rating agencies, recently downgraded the credit ratings of a swath of small and mid-sized U.S. banks, citing a substantial amount of unrealized loan losses not being captured by regulatory capital ratios.

However, not all banks are created equal, and some have managed to weather the storm better than others. In fact, some bank stockss may offer attractive opportunities for investors who are looking for undervalued and resilient stocks that can benefit from the economic recovery and the normalization of interest rates. Here are three bank stocks that fit the bill.

Truist Financial Corporation (TFC)

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Formed by the merger of BB&T and SunTrust in December 2019, Truist (NYSE:TFC) has transformed into a regional powerhouse with a strong presence in the southeast and mid-Atlantic states. The regional bank is the sixth-largest U.S. bank by assets. It has approximately $555 billion of assets on balance sheet as of August and features a diversified business model, offering a range of services such as retail and commercial banking, wealth management, insurance, mortgage and capital markets.

Truist has delivered uneven financial performance in 2023, despite the challenging environment. In the second quarter, the bank reported a net income of $1.3 billion. Though technically a year-over-year decline from last year, these metrics make sense in the current high interest rate environment which has made lending riskier for many banks, increasing loan loss provisions. These provisions offer a glimpse at how a bank expects its loan portfolio and revenue stream to perform as borrowers struggle to make monthly payments. It also has a negative effect on a bank’s profitability.

On the bright side, the bank’s insurance business, a consistent bright spot, posted a record $935 million in revenue, which was up more than 13% YoY. Additionally, Truist has also maintained a strong capital position, with a common equity tier 1 ratio (CET1) of 9.6%, well above the regulatory minimum of 4.5%. This ratio measures the amount of liquid assets on balance sheet versus total risk-adjusted assets.

In terms of share performance, Truist’s shares have largely underperformed the broader market in 2023, falling more than 26% year-to-date, compared to a 16% gain for the Standards and Practices (S&P) 500 index. However, the stock trades relatively cheaply at 9.2 times forward earnings and offers a generous dividend yield of 6.6%. These financial characteristics along with the bank’s regional prowess should get investors interested.

U.S. Bancorp (USB)

Source: Michael Vi / Shutterstock.com

U.S. Bancorp (NYSE:USB) is the fifth-largest U.S. bank by assets, with $680 billion as of the second quarter. The bank operates in 25 states across the midwest and western regions, serving more than 18 million customers through its network of more than 2,700 branches and 4,400 ATMs. U.S. Bancorp also offers a wide range of products and services, including consumer and business banking, wealth management, payment services and corporate and investment banking.

U.S. Bancorp has been one of the most consistent performers among U.S. banks, delivering superior profitability and efficiency ratios throughout the years. In the second quarter of 2023, the bank reported a net income of $1.5 billion. Similar to Truist, Bancorp suffered from higher provisions for credit losses. However, despite this setback, Bancorp maintained a robust capital position, increasing its CET1 ratio by 60 basis points to 9.1%. While U.S. Bancorp’s shares are down 9.5% year-to-date, the stock remains undervalued. U.S. Bancorp is trading at around 9.3 times forward earnings. The bank also offers an attractive dividend yield of 4.87%.

M&T Bank Corporation (MTB)

Source: Shutterstock

M&T Bank (NYSE:MTB) happens to be the smallest bank on this list. America’s 19th-largest bank by assets operates in 12 states and offers a variety of products and services, including retail and commercial banking, wealth management, mortgage and commercial lending. Out of the group on the list, M&T Bank delivered the strongest financial performance. In the second quarter in particular, the bank reported a net income of $867 million, up 299% year-over-year. If we exclude the bank’s $225 million sale of its “Collective Investment Trust business,” earnings were only up 20% from last year, but this is by no means a modest gain either. This strong net income growth was driven by both higher interest rates and demand for loans. M&T Bank also maintained a solid CET1 ratio at 10.59%.

Shares of M&T Bank have fallen more than 6% year-to-date, but strong revenue and earnings figures compared to others small-to-midsized banks could see shares end on a more positive note this year. M&T’s cheap valuation also drives its attractiveness: shares are trading at 9.4x forward earnings. This is one of the most undervalued bank stocks on the market. Don’t let the opportunity pass you up!

On the date of publication, Tyrik Torres 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.

Tyrik Torres has been studying and participating in financial markets since he was in college, and he has particular passion for helping people understand complex systems. His areas of expertise are semiconductor and enterprise software equities. He has work experience in both investing (public and private markets) and investment banking.

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