After lagging the market for most of the post-financial-crisis period, bank stocks are on a tear as investors view them as the single-largest beneficiaries of rising interest rates and the recent passage of the Tax Cut and Jobs Act.
But some bank stocks are better positioned than others to benefit from a favorable banking environment. Here's why these three Fools like Opus Bank (NASDAQ:OPB), JPMorgan Chase (NYSE:JPM)(NYSE:JPM-W), and U.S. Bancorp (NYSE:USB) as some of the best banks on the market today.
This niche bank is finally back on track and worth a look
Sean Williams (Opus Bank): Though a bigger bank might be tempting for investors, the bank stock I'd suggest investors consider right now is the considerably smaller Opus Bank.
Opus's focus (say that five times fast) is on supplying banking products and services to small- and medium-sized businesses, meaning it's carving out its own niche that it believes larger money center banks won't be able to match. Of course, trying to carve out this niche has come with some hiccups. Namely, there have been concerns about Opus Bank's credit quality, which is why its share price has fallen by nearly 30% since the summer of 2015 while other banks have seen their market caps expand significantly. What gets me excited is that Opus appears to have finally turned the corner on its lengthy balance sheet and portfolio transformation.
Over the past year and change, Opus has been hard at work de-risking its portfolio of questionable-quality loans, and packing its portfolio with higher-quality loans that are interest rate sensitive. Remember, were in the midst of a monetary tightening period by the Fed, so the more interest-sensitive loans that are current and on the books, the quicker Opus should see its income soar. CEO Stephen Gordon notes that the company ended fiscal 2017 with 90% of its loans having a floating rate, which should yield substantially more income for the company in 2018 and 2019, assuming the Fed sticks to its current rate-hike trajectory.
Despite jettisoning a number of higher-risk loans during 2017, the company still managed to originate $1.5 billion in loan fundings. Meanwhile, total criticized loans and nonperforming assets both decreased by more than 30% for the full year. We often hear about disciplined growth from bank management teams, but this is the proof in the pudding.
Though Opus may have scarred some investors with its less-than-stellar track record in recent years, it appears to be back on track. Considering that it's valued at less than 1.7 times its tangible book value, but expecting to see substantial income accretion as a result of rising rates, I'm inclined to believe it'll outperform its peers and the market in the years to come.
A stock you can bank on
Dan Caplinger (JPMorgan Chase warrants): JPMorgan Chase has done an admirable job of taking full advantage of the banking industry's growth since the financial crisis. The bank giant didn't completely avoid the pitfalls that cost it and its peers billions of dollars in fines and other charges related to the mortgage meltdown, but JPMorgan was able to get back to where it had been before the crisis a lot faster than most of its competitors. Strength in commercial banking, retail banking, credit cards, and wealth management have all combined to deliver extremely strong performance for the company. Moreover, with internal trading operations that haven't been as solid as they should be, JPMorgan has potential to bounce back even more fully.
Buying the bank's common stock is a perfectly valid choice, but I like a special situation that JPMorgan offers. The company issued warrants related to the TARP bailout back in 2008, giving investors the right to buy common shares at a price of about $41.76 per share. These warrants expire in late October, but their current price requires spending only about $1 more and getting the benefit of having to put up less than two-thirds of the cash upfront. The warrants make it slightly easier to afford buying JPMorgan now while giving you full exposure to future upside.
A bank built for any environment
Jordan Wathen (U.S. Bancorp): In a commodity business like banking, the only way to create an edge is by being the low-cost producer, holding down operating costs as a percentage of revenue. No one does better than U.S. Bancorp.
Banking analysts often "score" banks based on an efficiency ratio that captures what they spend on non-interest expenses as a percentage of net revenue. U.S. Bancorp's efficiency ratio typically comes in around 55% in any given quarter, leading its peer group, as even "good" banks struggle to keep their efficiency ratio below 65%. In banking, as with any business, higher margins are simply better.
U.S. Bancorp's fee-based sources of income also allow the bank to generate attractive returns without swinging for the fences by taking large risks in its loan portfolio. In 2017, its non-interest income sources covered approximately 74% of its non-interest expenses, thus allowing U.S. Bancorp to keep the lights on during periods of elevated loan losses.
U.S. Bancorp's steady-as-she-goes fee businesses and conservative loan portfolio survived the 2008 financial crisis intact, as the bank remained profitable even through one of the deepest downturns in a generation. I consider it a bank to buy and forget, one that should generate attractive returns for investors powered by a rare combination of fee income and the simple ability to manage costs better than its peers.