Last year, bank stocks were dragged down by some of the largest bank failures since the Great Recession. However, bank stocks have performed better over the past six months as the Federal Reserve pumped the brakes on its interest rate hiking campaign.
Despite the run-up, there are still appealing long-term investment opportunities in bank stocks that have ridden out challenges in the past few years. Here are three banks that can make solid additions to your portfolio today.
NYSE: C
Key Data Points
1. Citigroup
Citigroup (C +1.36%) is one of the United States' largest banks, holding nearly $1.7 trillion in assets. But despite its size and scale, it has failed to keep pace with its larger peers. Citigroup's sprawling global business has proven to be a headache, making it difficult to analyze and manage risks. As a result, the bank has underperformed its peers in profitability measures like return on equity (ROE).
In 2021, Jane Fraser became Citigroup's CEO. Upon assuming the top role, Fraser laid out plans to boost the bank's operating efficiency and profitability. To achieve this, Citigroup announced it would wind down or sell 14 consumer franchises, including its profitable business in Mexico. It would also reduce its workforce and flatten its management structure, eliminating 300 senior management roles.
C Price to Tangible Book Value data by YCharts
Citigroup has historically underperformed, which is a big reason why it trades at a 29% discount to its tangible book value. In comparison, peers Bank of America and Wells Fargo trade at a 47% and 62% premium to tangible book value.
Citigroup's restructuring is well underway. In March, it had sold or wound down 9 of its 14 consumer franchises. It also said its Mexico consumer business was on track for a planned initial public offering (IPO) by 2025. Citigroup continues to make progress, and a cheap valuation makes it an appealing opportunity for value-focused investors today.
2. Goldman Sachs
When interest rates began rising two years ago, volatile market conditions put a lid on one of the hottest IPO markets ever. The uncertainty around interest rates and the impact on markets had many unicorns putting their IPO plans on hold, resulting in some of the slowest IPO activity in decades.
Investment banking revenue at Goldman Sachs (GS 1.83%) plummeted 56% over two years ending in 2023. However, green shoots are emerging, which could be a good sign for Goldman and its investment banking heavy business.
NYSE: GS
Key Data Points
In the first quarter, Goldman saw its investment banking fees grow 32% from last year, thanks to strong growth across its advisory (mergers and acquisitions), equity underwriting (IPOs), and debt underwriting segments. CEO David Solomon told investors that large IPOs, including Reddit, were well received and showed an increased appetite for risk from investors.
Solomon also sees improving conditions for debt issuance and financing for acquisitions and expects "solid levels of debt underwriting activity to continue this year." With equity and debt underwriting markets improving, Goldman Sachs looks like an excellent value stock to scoop up, trading around 11.8 times its forward earnings for 2024.
3. Charles Schwab
Charles Schwab (SCHW +2.10%) has been a steady long-term performer for investors thanks to its solid return on equity. One key part of its performance is its reliance on low-cost deposits. This has magnified Schwab's strong performance over the past decade and a half, but it has also posed a problem during times of rising interest rates.
NYSE: SCHW
Key Data Points
Because Schwab relies heavily on low-cost deposits, its business feels it when those deposits are moved into higher interest-earning assets, which it calls "client cash sorting." Its cash sorting problem was pronounced in 2022 during the Federal Reserve's aggressive interest rate hiking campaign.
From August 2022 through April 2023, Schwab's total bank account deposits fell by 32% as clients moved their cash into higher-yielding alternatives. As a result, the company had to tap available lending facilities, such as the Federal Home Loan Bank (FHLB), to ensure it had enough capital and prevent a liquidity problem for the bank.
Schwab is now paying down some of those higher-cost debt arrangements and has seen its deposit outflows slow to a much more manageable pace.
It should also benefit from falling interest rates. According to the CME FedWatch Tool, markets are pricing three 25-basis-point interest rate cuts over the next year. With the stock priced around 17.1 times its one-year forward earnings, now's a good time to buy Charles Schwab.
