If a rising tide lifts all boats, bank stocks are the ship you want to be on.
Interest rates are rising. The economy is growing. And unemployment is below 4%, which has helped keep loan losses near historical lows. Best of all, most banks have spent the past decade shedding expenses, so a greater share of each dollar of revenue flows into pre-tax profit.
But investors can do even better by selecting the very best banks the market has to offer. Below, three Fool.com contributors make the case for why BB&T Corporation (NYSE:TFC), US Bancorp (NYSE:USB), and Goldman Sachs (NYSE:GS) are worthy additions to your portfolio.
A bank built for the long haul
Jordan Wathen (BB&T Corporation): This super-regional bank offers an attractive value as it realizes expense cuts in its core business and benefits from rising interest rates thanks to a sticky deposit mix.
BB&T is a powerhouse in the American Southeast, where it ranks as a top 10 bank by deposits in every state in which it competes. Thanks to established commercial relationships, roughly one-third of its deposits are noninterest-bearing -- deposits on which it pays nothing in interest. Costly and less-sticky certificates of deposit make up less than 9% of its deposits.
Investors who examine this bank based on headline figures will miss the favorable trends in its loan portfolio. Though loan growth has been flat, or even negative, in recent months, BB&T is effectively swapping low-yielding warehouse loans for higher-yielding commercial loans, thus generating better returns on its $144 billion loan book.
This slow-growing bank is unlikely to surprise, but that's a good thing. Bank investors know that BB&T was one of the very few that remained profitable even at the depths of the financial crisis, thanks to a conservative lending culture that puts credit quality ahead of growth. And at roughly 13 times Wall Street's consensus earnings estimate in 2018, investors aren't exactly overpaying for quality, either.
Go Midwest, young investor
Dan Caplinger (U.S. Bancorp): Most investors focus on the biggest banks in the country, and by that measure, U.S. Bancorp often flies just under the radar. Yet the Minneapolis-based super-regional bank occupies a space between the most massive too-big-to-fail banks and smaller regional players, with a nearly $500 billion asset base putting it squarely into the top 10 among American financial institutions.
U.S. Bancorp started 2018 strong, with solid mid- to high-single-digit percentage gains in key metrics like net interest income, payment services revenue, trust, investment management fees, and deposit service charges. Loan quality has remained strong, with minimal changes in delinquent loan ratios, and U.S. Bancorp's return on assets rivals the best levels in the banking business.
One big reason to expect further gains from U.S. Bancorp is the fact that lower corporate income tax rates should help it retain more of its profits. Historically, the bank has paid effective tax rates of around 27%, so the new 21% rate is already helping to boost its bottom line and should continue to do so throughout 2018. With the additional tailwinds of a more favorable interest rate environment for retail and commercial banking, now's a good time for bank investors to take a closer look at U.S. Bancorp.
An investment bank that is starting to branch out
Matt Frankel (Goldman Sachs): Goldman Sachs is well-known as a leader in investment banking, and for good reason. The company is a powerhouse in debt and equity underwriting, as well as merger and acquisition advising, and also has thriving investment management and trading businesses.
However, the reason I'm most excited about Goldman is for its expansion into consumer banking, which is still a relatively small segment, but is growing rapidly.
If you're not familiar, Goldman Sachs expanded into consumer lending in late 2016 through its Marcus platform. Since that time, the company has originated more than $3 billion in loans, a milestone which it achieved extremely quickly thanks to its consumer-friendly platform and generally favorable loan terms and features.
In addition, the Marcus platform offers online savings accounts and CDs, both of which have been very successful thanks to the bank's willingness to pay industry-high interest rates. As of this writing, Marcus' savings account rate of 1.60% and 12-month CD rate of 2.20% are the best available among major online banks.
To be clear, there's a long way to go before Goldman becomes a major player in consumer banking, but that's the point. This represents a potentially lucrative and largely untapped revenue stream for Goldman, and I'm excited to see where it goes in the years to come.