The banking sector got hit hard in 2020 mainly due to the coronavirus pandemic, which sent credit costs soaring and ultimately resulted in an ultra-low-rate environment that lowers the revenue outlook for banks. In recent months, the sector has begun to rebound with the majority of bank stocks trading back around tangible book value. Some bank stocks, however, have not been able to regain the confidence of investors and remain at steep discounts. Here are five of the worst-performing bank stocks in 2020.
1. Wells Fargo
One of the largest banks in the U.S., Wells Fargo (WFC -0.56%), made plenty of headlines in 2020. The stock is down roughly 45% year to date and traded around $29 per share as of this writing. Since 2018, the bank has been operating under an asset cap that prevents it from exceeding $1.95 trillion in total assets, as punishment for its phony-accounts scandal. The coronavirus pandemic only made matters worse. After taking a $2.4 billion loss in the second quarter, Wells Fargo trimmed its dividend 80%, and revenue looks like it will be challenged going forward.
All that said, it could be a great time to get in at Wells Fargo, with the bank trading at a discount to its tangible book value. CEO Charlie Scharf is looking to cut annual expenses at the bank by $10 billion. The asset cap will have been in place for three years in February, and although it's total speculation, analysts think the bank has a chance of exiting the asset cap in 2021, which would drive the stock price up. After all, Wells Fargo is still one of the most well-known brands in banking.
Image source: Wells Fargo.
2. Great Western Bancorp
Great Western Bancorp (GWB) is a $12.6 billion asset bank based in Sioux Falls, South Dakota. The stock has fallen 46% year to date and that's after a pretty big rebound in November.
The problem is that one of Great Western's largest loan portfolios happens to be the struggling hotel sector, which has been hammered by low occupancy rates as a result of the pandemic. Hotel loans make up 12% of Great Western's total portfolio. While net charge-offs (debt unlikely to be collected) have remained somewhat stable, non-accrual loans, those that haven't received any payments from borrowers in at least 90 days, jumped in the bank's most recent quarter and now make up 3.22% of total loans.
The bank is conducting an extensive review of the loan portfolio and setting aside lots of money for potential loans losses. Great Western is also trading at a discount to tangible book value.
3. Berkshire Hills Bancorp
The Boston-based Berkshire Hills Bancorp (BHLB 0.36%) is another roughly $12.6 billion asset bank that has been on a turbulent ride in 2020. The bank wrote down the entire $554 million of goodwill on its balance sheet, resulting in a big second-quarter loss. Then the bank cut its dividend, saw its CEO Richard Marotta abruptly leave the bank, and most recently sold eight of its branches and announced the consolidation of another 16, essentially reducing its branch footprint by a fifth.
Berkshire's stock started the year at $32.74, cratered all the way to less than $9 per share, and then rebounded significantly, trading around $18.50 per share, meaning it's down 43% year to date. I have previously written that I could see Berkshire as a potential acquisition candidate. Most banks are sold for more than their tangible book value, and Berkshire's tangible book value at the end of the third quarter was $22.22 per share, so it could have upside from here if it is eventually acquired.
4. S&T Bancorp
The $9.2 billion asset S&T Bancorp (STBA 0.39%) based in Pennsylvania recently traded around $23.75 per share, which is down about 42% year to date. The bank in May got hit with a major check-kiting scheme from one of its customers. The former executive of a nursing home company admitted to defrauding the bank for up to $59 million. The fraud really hurt the bank's asset quality and ultimately resulted a $33 million loss in the quarter. The bank is making efforts to get back as much of the money as possible, but it's obviously not a great sign to see a fraud event like this take place.
Some of the bank's credit metrics remain a bit high, but not all is bad at the bank. Through the first nine months of the year, the bank had an efficiency ratio, a measure of bank's total expenses expressed as a percentage of total revenue (lower is better), of less than 54%. This is also normally a high-performing bank. Even at $23.70, the bank trades for 122% of tangible book value.
5. PacWest Bancorp
The $28.4 billion asset PacWest Bancorp (PACW) got hit pretty hard early on in the pandemic. It took a big $1.47 billion goodwill impairment in the first quarter, resulting in a first-quarter loss. Then the company cut its dividend by 58%. It's currently trading around $25, down about 34% year to date.
While there are some questions with the bank's credit quality, the bank has some very attractive characteristics as well, including a 43% efficiency ratio for the first nine months of 2020, and return metrics in the third quarter of the year, that, while down from the bank's previous performance, are still very good relative to the industry.
