Banking is often seen as a cyclical sector, performing better when interest rates are rising and worse when they fall. Banks also tend to struggle during recessions because they are heavily linked to the economy. That said, banks can also be incredibly profitable, which is why growth stocks in the sector can really fly. Here are two bank stocks that should continue to outperform the industry.
1. SVB Financial
If you follow the banking sector, this one should come as no surprise. SVB Financial (SIVB.Q -50.00%), the parent company of the $124-billion-asset Silicon Valley Bank, has been an absolute beast following the Great Recession in 2008. The bank caters to the start-up, venture capital, and private equity communities with unique lending products, start-up banking, and a growing investment bank that is capitalizing on initial public offerings in the healthcare and life sciences sectors.
The bank saw its stock price appreciate from roughly $45 in January of 2010 to more than $251 at the end of 2019, representing a price appreciation of 546%. The pandemic only accelerated the popularity of Silicon Valley Bank's stock, which now trades at roughly $580 per share.
One of the reasons Silicon Valley Bank was able to buck this latest recession is because of its niche lending to venture capital and private equity firms. Starved for yield and concerned about the public markets and real estate in 2020, investors turned to the private markets. This led to lots of investment by venture capital and private equity firms into start-ups, which is good for Silicon Valley's business. The pandemic also accelerated digital trends, and more start-ups tend to pop up during and after recessions because more people become entrepreneurs.
Image source: Silicon Valley Bank.
Furthermore, the bank did a pretty good job of navigating past recessions and keeps a lot of liquidity on hand. Silicon Valley's recent acquisition of Boston Private Financial Holdings, so long as it ends up going through, should help accelerate the bank's growth in wealth management and in its private bank, while bolstering its position in Boston, another big start-up and venture capital ecosystem.
2. Signature Bank
The $85-billion-asset Signature Bank (SBNY), based in New York, is another bank that didn't slow down during the pandemic, but instead saw its growth and stock price accelerate. Entering 2020, the bank's stock traded for roughly $135 per share. Now it trades around $256. The bank has seen some of the same tailwinds as Silicon Valley Bank. In 2018, Signature launched its fund banking division to also cater to the private equity and venture capital communities. This lending segment grew as most of the banking industry struggled to find any meaningful loan growth outside of Paycheck Protection Program loans.
Additionally, in 2019, Signature also unveiled its Signet payments platform, a real-time digital payments platform that uses blockchain technology to clear and settle payments 24 hours a day, seven days a week, 365 days a year.
With Signet, two commercial clients on the network can move funds between one another at any day or time for free, although clients are encouraged to maintain balances of $250,000 or more in their accounts. This system is particularly useful for traders of cryptocurrencies, which trade around the clock. It also brings in lots of sticky, non-interest-bearing deposits, which helps to increase profit margins. And Signet is still relatively new and fairly untapped. Signature's fund banking and Signet platform should enable the bank to grow faster than the industry as a whole.
