Banks make money when rates are rising, taxes are falling, and loan losses are low. That's exactly the environment in which banks are operating today. Over time, a relaxed regulatory environment could help banks earn even more money by using their well-capitalized balance sheets to support asset growth or buy back stock.
Bigger can be better
Jordan Wathen (JPMorgan Chase): Don't write off the big banks as too big to grow. JPMorgan Chase has shown that even the megabanks still have ample opportunity to siphon off deposits and loans from smaller operators, while benefiting from margin expansion as they scale.
JPMorgan Chase is a true universal bank that has quietly grown to become the largest bank in the United States by assets, giving it substantial scale advantages over smaller banks -- and even its larger rivals. With $1.4 trillion in deposits across its operating units, the bank has the ability to spread expenses across a massive balance sheet, something even super-regional banks struggle to do.
Importantly, JPMorgan Chase derives just over half of its net revenue from noninterest income. These sources of income are the holy grail in banking, as they don't tie up a bank's balance sheet like lending does, and their growth isn't anchored to how much of its earnings power a bank retains year after year.
Best of all, JPMorgan Chase trades at a price that isn't indicative of its quality. With shares trading for roughly 11 times what it could very reasonably earn this year, investors get a great bank at an average bank price.
A buying opportunity in a fast-growing and ultra-efficient bank
Matt Frankel, CFP (Synchrony Financial): One bank stock I have my eye on right now is Synchrony Financial, a major issuer of store credit cards and operator of a fast-growing online bank.
Synchrony continues to grow at an impressive rate. Its loan portfolio of $87.5 billion is 14% higher than a year ago, and the bank took in $7.8 billion in net new deposits over the past year. Customer purchase volume on Synchrony's cards as well as the interest income generated by the loan portfolio both grew at double-digit rates as well.
Because of the high-interest nature of store credit cards, Synchrony's net interest margin is higher than most peers. And, because of the online-based nature of its banking operation, the company runs a more efficient operation than most other banks.
Synchrony has been beaten down recently because of the loss of its Walmart partnership and the news that the retail giant has filed an $800 million lawsuit against the bank. These are both certainly negative catalysts, but I don't see the lawsuit ending in Walmart's favor, and with a double-digit growth rate, Synchrony should be able to replace the lost Walmart revenue in just a couple of years. In a nutshell, the stock's near-30% drop so far in 2018 is overblown and the stock now looks very attractive.
Head north for strong banks
Dan Caplinger (Toronto-Dominion): Most bank investors don't spend enough time looking northward at the Canadian financial industry, especially given the extent to which the U.S. and Canadian markets overlap. Toronto-Dominion has a huge presence in the U.S., both through its retail-oriented TD Bank unit and its interest in brokerage house TD Ameritrade.
At the same time, Toronto-Dominion has more assets in its Canadian banking operations than any of its peers, and despite years of concerns that the housing market in Canada could eventually overheat and deliver a financial crisis-like blow to the nation's economy, Canada's banks have thus far done a good job of avoiding worst-case scenarios. Toronto-Dominion in particular has maintained solid credit quality while taking advantage of international opportunities as they arise.
Toronto-Dominion has seen its stock fall in recent months on concerns about trade, but most investors still expect the company to produce steady earnings growth for the foreseeable future. With recent strategic moves to bolster its asset management division, TD is looking to become a more complete financial services company. Toronto-Dominion reports its latest quarterly results late in November, and with a healthy dividend that's risen over time, investors who like banks should take a look at the Great White North and the prospects for economic prosperity that TD brings to the table.