Rising interest rates are good news for bank net interest margin, and that could make banking stocks smart buys ahead of a rumored increase of the Federal Reserve's benchmark rate in December. So we asked some of our top Motley Fool investors for their favorite bank stocks to buy right now. Read on to see if Wells Fargo (NYSE:WFC), Capital One (NYSE:COF), and Bofl Holding (NYSE:AX) should be added to your portfolio.
Long-term gains you can take to the bank
Sean Williams (Wells Fargo): Call me a glutton for punishment, but the top bank stock I believe investors should consider this November is embattled banking giant Wells Fargo.
To start with, I'm not going to condone any of the actions of its management team or employees that resulted in the opening of around 3.5 million accounts without consumers' knowledge to fuel high cross-selling expectations at the branch level. Wells Fargo has taken its lumps in recent quarters from this major flub, parted ways with former CEO John Stumpf, and has been dealt weaker quarterly results in lieu of that lost consumer trust.
But if I've learned anything as an investor in the banking sector, it's that investors have a short-term memory when it comes to screw-ups. As a longtime shareholder in Bank of America (NYSE:BAC), I've been privy to a company known for financial "boo-boos." It wound up taking heat for its decision to charge debit-card holders a monthly fee to use their cards in 2011, and it paid a hefty price for its acquisition of mortgage company Countrywide Financial, with legal settlement after legal settlement well into 2014. Still, Bank of America's stock has quintupled over six years. People forget these issues pretty quickly, which leads me to believe Wells Fargo will find itself in consumers' good graces soon enough.
Before its recent PR issues, Wells Fargo was widely considered to be the healthiest of the big banks. It avoided derivatives trading before the Great Recession and has stuck to the bread and butter of banking -- deposits and loans. This simple formula is a big reason it's consistently delivering a greater than 1% return on assets.
Wells Fargo also has the expectation of higher interest income working in its favor. The Federal Reserve's monetary tightening is great news for a bank that's generated 56% of its sales from interest income through the first nine months of 2017. An additional 100-basis-point increase to short- and long-term rates over the next year would probably add between $1.1 billion and $1.6 billion in added net interest income, according to its third-quarter Securities and Exchange Commission filing.
Long story short, expect a rebound and steady growth in due time.
Todd Campbell (Capital One): I have no idea if a Capital One credit card happens to be in your wallet, but even if it isn't, it's in the wallets of millions of other American consumers. The company is one of the country's biggest credit card issuers, and that's good news for investors, especially with interest rates heading higher and the holiday shopping season fast approaching.
Capital One operates a traditional bank, but its credit card business generates the bulk of its sales and profit. For example, its $4.3 billion in credit card revenue in the third quarter accounted for 62% of its $6.98 billion in total revenue, and its $572 million in net income from its credit card business represented about half of its $1.1 billion in companywide quarterly net income last quarter.
Clearly, this company's success is heavily reliant on a good market for consumer credit demand. Fortunately, a strong economy and low unemployment rate make this a very good time to be in this business. Last quarter, Capital One collected interest and fees on $109 billion in credit card debt, up 5% year over year, and on average, that debt's yielding 15.58%, up from 14.68% last year.
Credit card use doesn't seem to be slowing down, either. Capital One's credit card customers bought $84.5 billion of goods and services last quarter, up 8% year over year. I doubt that trend will lose momentum this holiday season, and if I'm right, then this could be a good time to buy shares. While the past is no guarantee for the future, Capital One's stock has historically rewarded investors in the final quarter of the year, gaining ground in eight of the past 10 years. It's anyone's guess what happens this year, but assuming people use their credit cards this holiday season, I think Capital One's in a good position to keep on delivering profit-friendly growth.
A different kind of bank
Brian Feroldi (BofI Holding): Banks had relied on branches for centuries to help them attract, retain, and service customers. However, branches are expensive to build, staff, and maintain. Those high costs are a major reason some banks fail to produce an attractive efficiency ratio.
BofI Holding came to that realization years ago and decided to forgo the branch model altogether. Instead, the company services its customers through the internet, phone, fax, or even mail. This decision helps to keep the company's cost structure extremely low. In turn, BofI can offer its customers attractive rates, provide great customer service, and still earn healthy profits.
This winning formula has turned BofI Holding into a home-run stock for its long-term investors:
Yet despite boasting a winning formula and having a history of market success, BofI's stock has been cast aside recently because the company is making investments in itself to power its next phase of growth. As a result, shares are currently trading hands for less than 2 times book value and around 9 times forward earnings. I'd argue that's a bargain price for a differentiated bank that's built for growth.
Brian Feroldi owns shares of BofI Holding. Sean Williams owns shares of Bank of America. Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends BofI Holding. The Motley Fool has a disclosure policy.