The Best Bank Stocks for Value Investors

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If you're a value investor on the hunt for a bank stock or two, then the list below will be of interest to you. It shows the 10 best big bank stocks for value investors:

Data source: YCharts.com.

The list is drawn from the members of the KBW Bank Index, the most widely tracked collection of large-cap bank stocks. It's the 10 stocks on the 23-stock index with the lowest valuations.

The measure of choice for valuing bank stocks is the price-to-book value ratio. Banks that trade for below book value are traditionally considered to fall on the cheap end of the spectrum, while those that trade for a premium to book value are on the spectrum's expensive end.

In this case, the three cheapest big bank stocks are Citigroup (C -0.35%), Bank of America (BAC 0.09%), and Capital One Financial (COF 0.69%). All of them trade for meaningful discounts to their respective book values:

• 35% discount for Citigroup
• 32% discount for Bank of America
• 26% discount for Capital One

Before going out and buying any of these bank stocks, of course, it's important to appreciate that there are reasons they trade for low valuations.

Bank of America and Citigroup have struggled since the financial crisis to generate respectable earnings. Both of them have been stymied on multiple occasions over the past few years when it comes to raising their dividends now that the Federal Reserve has veto power over big bank capital plans. Meanwhile, Capital One Financial's heavy focus on credit card loans exposes it to heightened credit risk.

The question in each case, then, is this: Is the discount big enough to compensate for the chance that these issues will cause these stocks to underperform their peers and the broader market?

I tend to think that the answer is yes -- which is why Bank of America is my largest stock holding.

Shares of Bank of America and Citigroup should continue to climb as their underlying performances improve. Both have come a long way since the financial crisis, but still have a long way to go before either is once again firing on all cylinders.

On top of this, bank stock valuations are in a cyclical trough right now thanks largely to low interest rates. Once rates climb, which is inevitable, so too will bank stock valuations.

It's for this reason in particular that Bank of America, Citigroup, and Capital One are at the top of the list of the best bank stocks for value investors.