The collapses of Silicon Valley Bank (a subsidiary of SVB Financial) and Signature Bank triggered a widespread sell-off across the banking sector. Investors are concerned about contagion from these two bank failures and whether there are more problematic banks lurking.
While conditions are still a bit chaotic, I believe most banks will survive this and that many banks are oversold and poised to rebound, creating attractive entry points for many of these stocks. Here are 14 bank stocks to buy.
Buy "too big to fail" banks
The largest and most complex banks in the U.S. that are ultimately "too big to fail" have all sold off since the SVB collapse began on the night of March 9, when it announced after the market closed that it would sell a portion of its bond portfolio, prompting broader fears about liquidity at the bank.
The largest bank by assets in the U.S., JPMorgan Chase (JPM 1.28%), has only declined a few percentage points. This is largely because JPMorgan still has an outsize cash position and its unrealized bond losses are not a threat to its tangible common equity position. Bank of America (BAC 1.71%), on the other hand, does have a substantial amount of unrealized bond losses that would destroy a significant amount of shareholder equity if the bank ever had to sell those bonds while they trade at a loss.
But this is an extraordinarily unlikely scenario given that BofA has an extremely diverse deposit base composed of consumers of all types and businesses in many different industries all over the world. Furthermore, the big banks will likely benefit from this crisis, at least in the near term as customers view them as a path to safety. A week ago, media outlets reported that Bank of America had seen $15 billion of deposit inflows, so I think customers are more likely to turn to these banks during times of distress as opposed to running from them.
Moreover, as the Federal Reserve eventually slows its interest rate hikes and bond yields come down, these unrealized losses in bank bond portfolios will decline. The yield on the U.S. 10-year Treasury bill has fallen from north of 4% earlier in March to slightly over 3.6% as of March 21.
The super-regionals offer opportunities
I also view many of the eight more traditional super-regional banks -- those with between $150 billion and $700 billion of assets -- as very interesting opportunities. Most of these banks have done a much better job at managing interest rate risk than SVB did. They also have much more diverse deposit bases, being quite prevalent in many states while serving a wide range of consumers and many businesses in different industries.
Most of these stocks have been hit hard since the SVB debacle, but banks like Fifth Third (FITB 2.85%), Citizens Financial Group (CFG 2.49%), Regions Financial (RF 2.52%), M&T Bank (MTB 2.57%), and KeyCorp (KEY 2.50%) have a very minimal amount of unrealized bond losses not already accounted for in their tangible common equity calculation.
While unrealized losses are more sizable for U.S. Bancorp (USB 2.78%) and Truist Financial (TFC 4.50%), Truist has more than $500 billion of assets, while U.S. Bancorp has $675 billion.
Their deposit bases are also so much more diverse than the likes of SVB. Truist operates in some of the fastest-growing states in the U.S. in terms of population growth, while U.S. Bancorp is a huge bank in terms of consumer and small-business banking. In its recently completed acquisition of Union Bank, which added about $82 billion of assets, U.S. Bancorp gained 1 million consumer banking accounts and 190,000 business banking clients, which should give you a small sense of its overall scale and depth of its deposit base.
Buy the buyers
In recent days, global banking regulators have sold parts of Signature Bank and also longtime embattled bank Credit Suisse (CS +0.00%), which seemed to be on the brink of collapse last week.
The buyers of these banks got what I would consider extremely sweet bargains. Also, keep in mind that regulators usually won't green-light a deal unless the acquirers are in good shape from a regulatory perspective.
New York Community Bancorp (NYCB 1.41%) purchased certain assets and liabilities from rival Signature Bank. The deal will improve NYCB's funding profile significantly and also jump-start new lending verticals that will help NYCB continue its transition from an old thrift banking model to a modern commercial bank. The deal will boost NYCB's tangible book value, or net worth, by 15% and will also lift earnings by 20% by 2024.
Another massive Swiss bank, UBS (UBS 2.06%), purchased Credit Suisse for about $3.24 billion. Consider that the latter traded at all-time lows at an $8 billion market cap just last week.
While many are worried about the execution risk UBS faces as it moves to wind down Credit Suisse's beleaguered investment bank, UBS also gets Credit Suisse's asset and wealth management business, as well as the Swiss domestic banking unit. This will give UBS significant scale in asset and wealth management, with $5 trillion of client assets, and make it the undisputed top bank in Switzerland, with roughly 30% deposit market share. The deal is also 74% accretive to UBS' tangible book value. Shares are up about 15% since early Friday.
Lots of opportunities
I'm not here to tell you that this banking crisis, which has been unfolding at light speed, is necessarily over or that other banks won't fall or be forced into an acquisition. I would steer clear of some of the banks really caught up in it like First Republic (FRC +0.00%). There also may be challenges ahead for the sector in terms of earnings this year and heightened regulation in the future.
But most of the banks mentioned above have done a better job of managing their balance sheets and preparing for the higher interest rate environment. Their deposit bases are also much more diversified than SVB's and don't face the same flight risk.
When uncertainty is at an all-time high is often when the best opportunities present themselves. There are no guarantees, but I do see some very attractive risk-reward dynamics reflected in the names mentioned above.
