The Best Banking Stocks for 2014

With the turn of the calendar quickly approaching, The Motley Fool has identified two of the best banking stocks for 2014 that any investor should consider.

2013 has been quite a year for banks, with the KBW Bank Index  (DJINDICES: ^BKX  ) up more than 30%, outpacing the 25% return delivered by the S&P 500. Well-known banks like Bank of America  (NYSE: BAC  ) , Wells Fargo, and even JPMorgan Chase -- despite its legal troubles -- all have a total return of more than 32%.

Those are certainly extraordinary results and may not be replicated next year, but there are nonetheless two stocks to consider moving into the new year, including previously mentioned Bank of America as well as super regional bank PNC Financial Services  (NYSE: PNC  ) .

Bank of America
Bank of America has been on quite a tear since the beginning of 2012, and its stock price is up more than 175%, which has led many to question whetherthere is any value left in the banking giant:

BAC Total Return Price Chart

Yet even despite this incredible run, the bank still remains radically less expensive when comparing its price to tangible book value -- which is the actual value available to shareholders -- relative to its fellow banking peers:


Source: Company investor relations.

Of course, simple relative value alone doesn't warrant an investment decision, but Bank of America has excelled in growing its businesses as well. The four core business lines at Bank of America have seen their net income rise by more than 10% in total when comparing the first nine months of 2012 to 2013:


Source: Company investor relations. Dollar figures are billions.

While the dip in Global Banking revenue is disconcerting, this is primarily due to a $400 million gain in 2012 from the releasing of its provision for credit losses (what it expects to write off), compared to a $600 million cost in 2013. A simple calculation of revenue minus expenses and taxes (excluding the provision) actually yields a net income increase of some 22% (from $3.6 billion to $4.3 billion) for its Global Banking business.

Bank of America has had a host of issues to deal with over the past few years, but it has steadily put its legacy issues behind it, and its core operations are truly showing the underlying business strength. All in all, it is tough to beat a bank that couples an attractive valuation and core business results.

PNC
Like Bank of America, PNC has had quite a run in 2013, as its stock is up almost 30% on the year. In addition it has seen great success from its operations, as its year-to-date earnings-per-share growth actually outpaces that of its common stock. Its earnings per share is up from $4.10 to $5.61 when comparing the first nine months of 2012 to 2013, an increase of 37%. And as you saw in the chart above, like Bank of America, PNC too is pretty cheap.

Yet one of the most compelling things about PNC is the leadership from CEO Bill Demchak. While his Glassdoor employee approval rating of 87% is laudable, so is his abject honesty about the direction of the bank. Demchak has plainly stated the company understands the underlying dynamics of banks are changing, and more than ever banks need to explore new sources of revenue -- principally through fees -- and growth.

To that end, PNC has performed well in 2013, growing its noninterest income from 37% of its total revenue in 2012, to 43% through the first nine months of the year. The bank is also expanding broadly in the Southeast and in specialty lending markets, being principally concerned with the more profitable relationships with companies and not consumers.

In a recent investor presentation, the company noted that the 53% or $34 billion of loan growth in its Corporate & Institutional Banking business since March of 2010 was "driven by specialty areas," to the tune of $10.4 billion. In addition the company has seen its primary clients grow by 30% in the Southeast, and -- while it still has a lot of room for improvement -- its brand awareness has grown from just 29% in March of 2012 to 52% in June of this year.

Of course the 30% returns delivered by these two will be incredibly difficult to duplicate -- but all in all, investors could do much worse than investing in these two stocks for both 2014 and beyond.

The best stock now
Banks, and in fact the entire market stormed out to huge gains across 2013, leaving investors on the sidelines burned. However, opportunistic investors can still find huge winners. The Motley Fool's chief investment officer has just hand-picked one such opportunity in our new report: "The Motley Fool's Top Stock for 2014." To find out which stock it is and read our in-depth report, simply click here. It's free!


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