Bank stocks have been among the worst-performing sectors in the stock market recently, fueled by plunging interest rates and recession fears. However, when everyone is pessimistic on a sector, that's a great time to look for value.
A solid value play for patient investors
Matt Frankel, CFP (Goldman Sachs): At first glance, Goldman Sachs may not seem like a great bank stock to buy. The company missed revenue expectations in the first quarter and CEO David Solomon acknowledged that the environment has been challenging. Plus, there's still lots of legal uncertainty related to the failed 1MDB Malaysian bond fund.
But from a longer-term perspective, now could be a smart time to buy. Despite the recent revenue miss and legal uncertainty, Goldman is generating a strong return on equity, its investment banking business (particularly advisory) is doing quite well, and the wave of IPOs that occurred after the first quarter (and continue to take place) could be a big help to Goldman as 2019 continues.
What's more, the recent stock market weakness and plunging interest rates have put pressure on the banking sector. Goldman's share price has fallen by 12% over the past month alone and now trades for more than 15% less than its book value -- its lowest valuation since the late-2018 market drop. And the bank is buying back its own stock at an aggressive pace, which should result in significant value creation all by itself. During the first quarter alone, the bank spent $1.25 billion on repurchases, which represents an annualized rate of more than 6% of the bank's total outstanding shares.
To be clear, there's bound to be substantial volatility in the short term with the trade war putting pressure on interest rates, and the Malaysian scandal's legal uncertainty. However, investors with a long-term focus should do well buying at these levels.
Profit from India's growing middle class
Matthew Cochrane (HDFC Bank Limited): HDFC Limited was incorporated in the late 1970s to provide India's growing middle class with a way to finance home purchases. HDFC, which stands for Housing Development Finance Corporation, has since grown into India's largest bank and now provides a variety of financial services ranging from life insurance and savings accounts to asset management and credit cards. In 1994, HDFC Bank was spun off from the parent company with a single full-service branch in Mumbai. It has since grown into a financial conglomerate, blanketing India with more than 5,100 bank branches and 13,000 ATMs across 2,748 cities.
The bank supports the latest fintech -- for example, it enables 75 different transactions that can be competed on mobile devices -- to ensure its account holders have all the access and convenience that global bank customers now expect.
HDFC also provides a lucrative way to invest in India's rapidly growing economy and its rising middle class. About 66% of India's population is younger than 35, while the number of city dwellers is expected to increase from 32% of the population to 50% by 2030. HDFC Bank is well positioned for this shift, however, with approximately 53% of its branches in semirural areas and the rest in metro and urban locations. All branches support its more than 49 million account holders with online access in real time.
HDFC continues to grow at a far faster rate than most mature American large banks. In its most recent quarter, revenue and income grew by more than 20% year over year, driven by 20% annual average asset growth.
Do you bank in a land down under?
Dan Caplinger (Westpac Banking): Few U.S. investors look beyond the nation's borders for investments, especially when it comes to financial institutions. American banks play dominant roles in the global economy, but that doesn't mean that other countries don't have solid players of their own. Westpac Banking is one of Australia's four largest banks, and it plays a key role in maintaining the health of the Australian economy.
Westpac is definitely a value play for investors right now, as the bank has gone through tough times. A difficult housing market contributed to Westpac seeing its weakest profit in years during the six-month period that ended in March, and CEO Brian Hartzer also pointed to "intense" regulatory activity and an overall malaise in economic activity from both consumers and businesses. Even as housing prices have fallen in some key areas, Westpac has had to deal with increased competition to make loans without sacrificing asset quality. A scandal involving its now-discontinued financial advice business also hit the bank's reputation.
However, Westpac just got a boost from Australia's latest elections, which saw Prime Minister Scott Morrison and his Liberal-National coalition unexpectedly returned to power despite a strong challenge from Labor party opponents. That has bank investors hoping for a more business-friendly environment -- and that could lead to a rebound for Westpac if economic conditions improve as a result.