The stock market is roughly 30% down from its all-time highs of less than two months ago, and to say it's been quite a roller coaster ride since that time would be a massive understatement. The financial sector has been hit especially hard, with many bank stocks significantly underperforming the market during the downturn.
However, there could be some opportunities for long-term investors. Here's why bank stocks have been one of the weakest parts of the stock market in the COVID-19 market downturn, and why Bank of America (BAC -0.43%), Goldman Sachs (GS 0.90%), and Wells Fargo (WFC -0.76%) look extremely attractive from a long-term perspective.
Why have bank stocks fallen so much?
To be clear, there are good reasons these stocks have performed so poorly. For one thing, interest rates have plunged to all-time lows. Banks get much of their revenue from lending money and collecting interest, and if interest rates fall, bank profit margins tend to do the same.
Plus, with the U.S. economy in recession and no way to know how long it could last or how bad it could get, there could be a rise in loan delinquencies as consumers have trouble paying their bills. It's certainly nice to see that most banks are doing the right thing and working with customers who have lost income, and profits aren't their top concern right now, but the point is that these concerns have driven bank stocks lower.
3 great bank stocks for long-term investors
With that in mind, I tend to gravitate toward the larger banks, especially in these uncertain times. Remember, the big banks have been subject to stress tests for the past several years, and we know they're in a position to get through a massive recession. And there are some pretty attractive opportunities in the space right now.
Bank of America has fallen 39% since the beginning of February and now trades for just 73% of its book value. The company has done a fantastic job in recent years of improving asset quality and efficiency and has emerged as a leader in mobile banking technology with one of the highest-rated apps in the business. While the focus isn't on growth right now, Bank of America has produced the best deposit and loan growth of its peer group in most recent quarters, and I don't see any reason why that trend can't resume when the economy gets back on track.
Goldman Sachs is trading at a price-to-book valuation (64% of book value) that hasn't been seen since the financial crisis era. To be sure, Goldman's investment banking business is likely to suffer -- IPOs and M&A activity have come to a screeching halt recently -- and the wealth management business which earns fee income based on its assets under management is going to lose revenue because of the market downturn.
However, there are some positives. Goldman's trading revenue could actually benefit from the market volatility we're seeing. And Goldman's consumer banking business, which is already planning to offer checking accounts and an investment platform, still has tremendous room to grow when the coronavirus crisis is over.
Finally, Wells Fargo has been the worst performer of the group recently, down 43% since the beginning of February. And that's on top of its sector-lagging performance ever since the infamous fake accounts scandal was revealed several years ago. Once the highest-valued bank of the "big four," Wells Fargo now trades for a 35% discount to its book value.
As primarily a consumer bank (the other two have large investment banking and trading operations), it's easy to see why the reasons I outlined earlier could be affecting Wells Fargo more than the others. However, new CEO Charles Scharf is doing an excellent job of helping the bank move forward from its scandal-plagued recent history, and I think it's only a matter of time before the growth-limiting Federal Reserve penalty that has been a big reason for the bank's underperformance is removed.
Expect the turbulence to continue
At some point, the coronavirus outbreak will start to turn a corner and we'll start to get some clarity on when we can expect the U.S. economy to start getting back to normal. And at some point, interest rates will start to rise and hopefully stabilize.
However, there's no sign that either of those events will happen anytime in the immediate future. If you invest in any of these three bank stocks (or any others for that matter), be sure you're comfortable with some pretty intense price swings, as the volatility is likely to continue until we start to see the other side of the pandemic.