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2 Incredibly Cheap Financial Stocks

By Dave Kovaleski - May 23, 2021 at 5:08AM

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One you've definitely heard of; the other, maybe not.

The financial sector has been a welcome place for investors recently, bouncing back nicely in 2021 with the tailwinds of an improving economy likely to propel it forward into the future. For good stocks at great values in this sector, the best place to look right now is the banking industry, which is surging on the strength of stimulus money, job growth, and a growing economy.

Here are two bank stocks that are off to great starts in 2021 but remain incredibly cheap. One you've certainly heard of, as it's one of the biggest banks in the world; the other, probably not, unless you live in its main coverage areas. Let's start with the latter.

A business person on a Zoom call, making a presentation using data as they point to a document with a pencil.

Image source: Getty Images.

FNB is up 42% year to date

FNB (FNB 1.44%) is the Pittsburgh-based financial services company that owns First National Bank of Pennsylvania. First National Bank has about 350 branches, mostly in and around Pennsylvania, North and South Carolina, and the Baltimore and Washington, D.C., metro areas.

FNB's stock price is up 42% year to date at Friday's close, trading at $13.52 per share. It is highly undervalued, trading below its book value of $15 per share, which means its assets on the books have a greater value than the market is currently assigning them. It also has a low forward price-to-earnings ratio of 12.6.

There is a good deal to like about FNB, and the market is missing the boat. In FNB's first quarter, its net income doubled year over year to $91 million, or $0.28 per share, and its book value grew 4%. Loans grew 8.3%, powered by an 18% increase in commercial loans, while deposits grew 20%, reflecting a surge in deposits from various government stimulus programs.

While banks still struggle with net interest income due to the record-low interest rates and FNB is no exception, FNB has been diversifying its revenue stream with more fee-based income. In the first quarter, net interest income was down 4%, but the bank had a record quarter for non-interest income, up 21% year over year. This increase came from its mortgage banking, insurance, capital markets, and wealth management businesses. Overall, those four businesses saw revenue increase 56% over the first quarter of 2020.

In addition, the bank has bolstered its digital banking capabilities and expanded into new, growing markets, including Baltimore, Washington, Raleigh-Durham, and Charlotte.

With the strategic moves to diversify revenue, expand into new markets, and upgrade its digital channels, amid a growing economy and hopefully improving interest rate environment, FNB is a great buy at a cheap valuation.

Winds of change blowing at Citigroup

Citigroup (C 0.70%) is one of the big four national megabanks, and along with Wells Fargo it has underperformed its peers over the years. Wells Fargo has been dealing with the fallout from an accounting scandal, but Citigroup has had its own issues, albeit not on the same level. Last year, it was fined $400 million by federal regulators for not fixing its internal accounting controls

But Citigroup has made moves to correct those internal controls. It also hired a new CEO, Jane Fraser, who became the first woman to run a major U.S. bank. Since taking over in March, Fraser has made some key strategic moves to refocus on areas where she sees growth.

Part of that involves exiting consumer banking in 13 of Citigroup's lower-growth global markets, primarily in Asia, Russia, Eastern Europe, and Australia, while keeping investment banking, corporate lending, and trading services in those places. These markets were not only underperforming but also posed regulatory challenges and other risks associated with doing business in so many different international markets. 

The other part is focusing international consumer banking in four wealth centers -- Singapore, Hong Kong, the United Arab Emirates, and London. These are areas where Fraser sees strong growth potential, particularly in wealth management, as Citigroup looks to capitalize on its global footprint and brand, which are more prominent than its competitors'.

Citigroup is coming off a solid first quarter in which net income jumped to $7.9 billion, up from $4.3 billion in the fourth quarter and $2.5 billion a year ago. This was buoyed by increases in the institutional clients group, which includes investment banking, corporate lending, and treasury and trade solutions, as well as an allowance for credit loss release.

The book value increased 5% to $88 per share, which is higher than Friday's $77.65 per share stock price. Citigroup is trading at just 10 times forward earnings, which, combined with its low book value, makes it a very attractive valuation. Citigroup is headed in the right direction and investors would be wise to capitalize on the current opportunity.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Dave Kovaleski 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

Citigroup Inc. Stock Quote
Citigroup Inc.
C
$54.38 (0.70%) $0.38
Wells Fargo & Company Stock Quote
Wells Fargo & Company
WFC
$45.94 (1.52%) $0.69
F.N.B. Corporation Stock Quote
F.N.B. Corporation
FNB
$12.72 (1.44%) $0.18

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

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