In recent weeks, bank stocks have been on a tear. The Federal Reserve signaled an intention to stop rate hikes, and many believe rate cuts will soon be on the horizon. That should help banks underwrite more loans at more affordable interest rates.

The recent rally pushed up valuations quickly, but a few bargains remain, like Citigroup (C 0.73%) and HDFC Bank (HDB -0.48%), which trade at deep discounts to their peers.

This stock is under the radar

Have you ever heard of HDFC Bank? Most people haven't, even though its market cap is bigger than that of Citigroup, the next stock on this list.

HDFC flies under the radar because most of its business is based in India, the world's fifth-largest economy with a population of 1.4 billion people. Last year, it overtook China as the world's most populous country.  HDFC rode this population boom for decades. In 2014, its market cap was around $30 billion. Today, the company is worth more than $135 billion, a sizable increase over such a short period of time.

HDB Market Cap Chart
HDB Market Cap data by YCharts.

Over the past month, however, while other bank stocks have been rallying, HDFC shares slumped by nearly 20%, shedding $30 billion in market value. What's going on?

In mid-2023, the bank merged with India's largest mortgage lender, the similarly named Housing Development Finance Corporation. The merger created the world's fourth-largest bank, providing huge economies of scale.  Only 30% of the mortgage clients have a bank account with HDFC, while only 2% of the banking customers have a mortgage through the Housing Development Finance Corporation. There should be plenty of opportunity for cross-selling.

The merger was not without risk, however. Operating costs have risen, and it could take years to fully integrate each business.  Lower-than-expected margins recently slammed the stock, but those willing to wait through the post-merger mess can buy into one of India's fastest-growing banks at a rare discount.

Citigroup remains a true bargain

When Warren Buffett puts billions of dollars to work, it usually pays to listen. In early 2022, the Oracle of Omaha purchased $3 billion of Citigroup stock, appearing to bet on a turnaround plan initiated by newly inducted CEO Jane Fraser. Two years later, Buffett still owns the stock. Should you join him?

Many investors remember Citigroup as one of a handful of banks that required a bailout from the U.S. government during the 2008 financial meltdown. The company has been trying to shed that reputation for over a decade, but the market remains hesitant to forgive.

On a price-to-book basis -- a very useful metric that reveals how much an investor must pay for a bank's assets -- Citigroup stock trades at a multiple of just 0.55.  That means the market is only willing to pay 55 cents on the dollar for the bank's assets. HDFC Bank, in comparison, trades at a price-to-book multiple of 2.6.  To be fair, HDFC has a much stronger history of growth over the past decade compared to Citigroup, but the gap in valuation highlights how little the market believes in Citigroup's prospects.

Is paying 55 cents on the dollar for Citigroup's assets as big a bargain as Buffett seems to think? There is one major reason to be bullish.

After years of painful restructuring, Citigroup finally appears poised for a return to normal. Over her tenure, Fraser has greatly streamlined the bank's international operations in an attempt to cut costs and become more responsive to market opportunities. Management layers, for example, have been cut from 13 to just eight, with many now reporting directly to Fraser.

This transformation wasn't easy. It required thousands of early buyout packages and one-time costs that bloated the bank's income statement, reducing Citigroup's profitability versus its peers'.  Good things, however, often come to those who wait. Fraser expects most of the restructuring efforts to conclude early this year, with the hard-won cost savings finally resulting in increased profitability.

Will Citigroup finally succeed where it has failed before? That remains to be seen, but as Buffett's investment shows, the current valuation is too good for many to pass up.