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3 Top Bank Stocks to Buy Right Now

By Bram Berkowitz - May 14, 2020 at 6:00AM

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These stocks could perform well during the pandemic.

Bank stocks have taken a hit since the coronavirus pandemic struck the economy, but most experts say the banks are not the main concern in this crisis, like they were during the Great Recession. The banks are believed to be well capitalized, and Warren Buffett even said himself that he does not see any special problems with the banks. That means there is a good chance most of them will recover once the public health crisis is over. Here are three top bank stocks to buy right now that should perform well through the pandemic.

State Street building

Image source: Getty Images.

1. State Street

It will be hard to find too many banks that performed better than State Street (STT 1.43%) in the first quarter of the year. As most banks reported a drop in earnings or net losses as a result of the coronavirus, this bank reported a $634 million profit, up nearly 25% year over year. Earnings per diluted share of $1.62 in the quarter were up more than 37% over the same period in 2019. I am not sure this company would have been an amazing buy before coronavirus, but State Street is different from many traditional banks because it has a relatively small loan book and earns most of its revenue through fees from investment management and servicing.

Gains in the quarter came from a 64% increase in fees from foreign exchange trading services. State Street helps clients make currency trades and collects fees when trades are commenced. So the more trades, the more fees, which is exactly what happened in March as a result of market volatility. This segment could serve as a nice hedge for the company because it will do well if coronavirus creates more market volatility through the year. 

Two other factors made me like State Street. The bank was one of the few that were actually able to provide guidance for the year. Not all of it was great -- fee revenue is supposed to be down 1% to 2% for the full year compared to 2019, and net interest income is expected to decline by roughly 10% compared to 2019.  There are certainly hard times ahead, but it signals that the bank believes there is more certainty in its business, as opposed to other banks that have abandoned guidance and are very unsure about how things will play out.

When asked by an analyst on the company's recent earnings call about resuming share repurchases later this year, CEO Ron O'Hanley did not rule it out. "If this all plays out as we see, we believe we'll be in a position to distribute capital, but we think it's wise to be able to make that decision dynamically quarter to quarter," he said. 

2. Silvergate Bank

Silvergate Capital (SI 3.85%) is a small but unique bank doing some exciting things with cryptocurrencies. The bank, which went public in late 2019, does offer traditional financial services, but it's focusing more on being a leading provider of innovative solutions and services for the digital currency industry. Its flagship product is the Silvergate Exchange Network (SEN), an instantaneous payment platform for digital currencies that has created some highly attractive characteristics for its banking profile.

For instance, the digital currency platform has enabled the bank to bring in lots of non-interest-bearing deposits, which made up more than 87% of the bank's total deposit base at the end of the first quarter. Those help bring down a bank's total funding costs and keep those funding costs down through interest rate cycles. Additionally, the SEN network and its various capabilities bring in more non-interest income through fees, which is extremely beneficial when you consider that interest rates on traditional banking products such as loans have been extremely low since the Great Recession in 2008.

Silvergate reported a 53% drop in earnings in the first quarter, but that number is not as bad as it looks because the bank realized a $5.5 million gain on the sale of a branch in the first quarter of 2019. If you exclude that gain, the bank likely would have seen an increase in net income on a year-over-year basis. Silvergate also recorded a 108% increase in non-interest income in the first quarter. Digital currency customers grew to 850 in the first quarter, compared to 617 in the prior-year period. SEN also processed 31,405 transactions in the first quarter, compared to just 7,097 transactions 12 months before. This will definitely be an interesting bank to watch, and its stock price is down very little since the start of the year, showing resilience through a turbulent quarter.

3. People's United Financial

Profits at People's United Financial (PBCT) grew 14% on a year-over-year basis in the first quarter of 2020. Furthermore, CFO David Rosato said on the company's recent earnings call that "we believe we will be profitable every quarter," when asked about the bank's outlook for the year. The bank is also very diversified, with no loan category making up more than 35% of the commercial real estate portfolio, and no category making up more than 26% in the bank's equipment financing and commercial and industrial loan portfolios. The bank does have some exposure in the restaurant and retail industries, but executives did not seem overly concerned. The bank has no material exposure to loans in airlines, cruise lines, casinos, energy, student loans, auto lending, or consumer credit cards.

Another recent positive is the bank's participation in the Paycheck Protection Program (PPP). People's United originated more than 9,600 emergency PPP business loans, totaling more than $2.1 billion, and that was only through round one of the program. Those loans come with virtually no risk and substantial origination fees that should hit the bank's balance sheet in the second or third quarter of this year.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

State Street Corporation Stock Quote
State Street Corporation
$74.56 (1.43%) $1.05
People's United Financial, Inc. Stock Quote
People's United Financial, Inc.
Silvergate Capital Corporation Stock Quote
Silvergate Capital Corporation
$105.48 (3.85%) $3.92

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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