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2 Top Bank Stocks to Buy In 2017

By Matthew Frankel, CFP® - Jun 30, 2017 at 3:47PM

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Here are two bank stocks that look attractive right now.

Since early 2016, the banking sector has been a top performer, returning 53% since its February 2016 lows and handily beating the S&P 500's 33% return since that time. Despite the tremendous rally, there might still be some bargains to be found in the banking sector. Here are two in particular that look attractive: one regional bank with a time-tested business model and one up-and-coming "bank of tomorrow."

This regional niche lender could still have a bright future

Regional lender New York Community Bancorp (NYCB 0.22%) has not only underperformed the financial sector, but has declined over the past year and a half. First, the bank announced a merger agreement with Astoria Financial, which resulted in a dividend cut and shares falling. Then, toward the end of 2016, the bank announced that the deal would be scrapped, and shares fell even further. The poor performance is especially uncharacteristic of the bank, which returned more than 4,000% since its mid-1990s IPO.

Bank teller greeting a customer.

Image source: Getty Images.

One potential reason for the poor performance, as my Foolish colleague John Maxfield recently wrote, is that the reasons for terminating the merger remain unclear, leaving too many unanswered questions for investors. In its most recent investor presentation, the bank did address the situation, but simply said that the merger termination was due to "external factors."

While I'm not thrilled with management's decisions lately, it's important to keep in mind that this is still a rock-solid bank with a unique business model. Specifically, the bank's main business is making loans on rent-controlled or rent-stabilized New York City apartment buildings, which has produced fantastic efficiency and asset quality. These buildings tend to have excellent tenant retention in any economic conditions, and their loans are relatively inexpensive to produce and service.

NYCB charge-off history.

Image source: NYCB investor presentation.

Furthermore, while the bank's 51% efficiency ratio for the first quarter isn't nearly as good as the mid-30s where it has traditionally been, it's still far better than the sector average of more than 61%. The bottom line is that while there is certainly reason for frustration, this bank seems to have taken more of a beating in the market than it should have, and could be well-positioned for a rally, especially if some of the Dodd-Frank regulations are dismantled under the Trump administration.

This could be the next big thing in banking

If you have a little more risk tolerance and a long investment time horizon, you might want to take a look at BofI Holding (AX -0.46%), an internet-only bank with nearly $9 billion in assets. The idea behind BofI's (stands for "Bank of Internet") business model is simple. Since it doesn't have to pay for physical branches and the costs of maintaining and staffing them, the bank naturally has a cost advantage over brick-and-mortar banks.

The numbers back this up: BofI's return on equity of 21.1% and return on assets of 1.94% are roughly double the industry benchmarks of 10% and 1%, respectively. The primary reason for this outstanding profitability is that the bank's non-interest expense is less than half of its peer group average.

Right now, the bank is relatively small. To put it in perspective, BofI has roughly 0.4% the assets of Wells Fargo. However, it's growing fast. The bank's assets have grown by 13% over the past year, and loan originations have grown at an annualized 43% rate since 2011.

BofI loan portfolio growth.

BofI's loan portfolio continues to grow at a rapid pace. Image source: BofI investor presentation.

BofI continues to expand its product offerings in an effort to keep the growth alive. The bank is just starting to venture into auto lending and unsecured personal loans. And its refund anticipation lending operation in partnership with H&R Block opens up massive potential for not only increasing the deposit base, but cross-selling other products and services to customers from H&R Block's roughly 10,000 branches. If these ventures are successful, there could be many years of growth ahead for BofI.

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Stocks Mentioned

New York Community Bancorp, Inc. Stock Quote
New York Community Bancorp, Inc.
NYCB
$9.06 (0.22%) $0.02
Axos Financial, Inc. Stock Quote
Axos Financial, Inc.
AX
$36.61 (-0.46%) $0.17

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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