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The 4 Worst Bank Stocks of 2014

By Motley Fool Staff – Dec 5, 2014 at 6:58AM

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There are some bank stocks that simply don't make sense as investments right now. Here are four to stay away from.

Most of the banking industry has performed pretty well this year. Investment banking revenues are up, thanks to the high M&A and IPO activity resulting from the strong stock market. And, consumer banking activity like lending and brokerage activity is doing very well.

However, there are some bank stocks that aren't doing so well. We asked two of our analysts which bank stocks they would absolutely not want to own going into 2015, and here is what they had to say.

Matt Frankel: One bank stock I would definitely recommend investors avoid is Banco Santander (SAN -3.97%). Despite the fact that shares are very cheap right now on a price-to-book basis (just 1.02 times book value) and pay a hefty 9.7% dividend, this is one case where a stock is cheap for a reason.

Based in Spain, Santander also has a lot of exposure to Brazil. Both Europe and Brazil are having serious economic issues right now, and I wouldn't want to be invested in a company tied to either one. For example, Brazil's debt was downgraded earlier this year by Moody's, and the outlook for its banks was cut to "negative".

The biggest reason I would avoid Santander right now is the dilutive nature of its dividend, not its sustainability. Even though the company pays out more than it earns (the dividend is about $0.81 per share, while the consensus calls for just $0.59 in earnings for 2014), most of its shareholders choose to receive more shares instead of a cash payment.

In other words, instead of actually paying out cash, the company simply issues new shares each time a dividend payment is due. And, if the dividend is more than the company makes, this has a very dilutive effect on the value of Santander's shares.

I would recommend investors avoid exposure to European and Brazilian banking, and especially Santander.

Eric Volkman: Nearly all of Europe has been struggling economically for some time now, and that's especially true of deeply troubled Greece. As with their mother economy, Greek banks continue to be in an awful state, and one of the nation's biggest is National Bank of Greece (NBG.DL).

Greek GDP has plunged and so has bank loan quality, with the sector's ratio of non-performing loans to total gross loans swelling to over 31% in 2013 (from 23% the year before, and 14% in 2011).

Billions of euros from supra-national institutions have been pumped into the country and its banking system. Still its lenders are scrambling for capital, any kind of capital from anywhere, in order to stay solvent. National Bank of Greece has feverishly issued shares and floated a big bond issue lately – not exactly an indication of good financial health.

As a result, despite some encouraging signs of life recently for both banks and the domestic economy, National Bank of Greece stock has been battered severely this year, losing over 60% of its value and hitting a fresh one-year low last week. For investors, Greece is in the doghouse and this lender is one of the biggest mutts on the market.

Matt Frankel: Another bank stock I personally wouldn't buy going into 2015 is Barclay's (BCS -5.98%). While I like Barclay's products, and I like the overall banking sector in general, there is simply too much risk here to justify an investment.

Barclay's investment banking division has struggled to produce results lately with revenue down 10% in the last quarter, and the bank has struggled to keep costs down. In fact, the bank's cost-to-income (efficiency) ratio of 67% is among the highest in the business.

Also, Barclay's capital levels are among the worst in the industry. The company's 3.5% leverage ratio is the lowest among major U.K. banks.

Plus, ongoing litigation issues are a cause for concern. For instance, Barclay's just recently pulled out of a settlement with the U.K.'s Financial Conduct Authority (FCA) which involves allegations of attempted manipulation in the foreign exchange markets. And, the bank is still under investigation by the U.S. Justice Department.

While bank investors are definitely used to legal issues by now, there are many other banks to choose from which have put the majority of their litigation expense behind them.

So, don't be fooled by Barclay's extremely low valuation of just 64% of book value. This is another case of a stock that's cheap for a reason.

Eric Volkman: Like Matt, I'll hoist the Union Jack for my second pick. Over the past year, the price of Lloyds Banking Group's (LYG -7.11%) American Depositary Receipts has gone exactly nowhere, moldering at around the level of $5 apiece.

There are plenty of reasons why. The U.K. government is still a key shareholder, this more than five years after it jumped in with a massive rescue package to keep the bank alive (although, it should be noted, that holding has dropped from 43% to the current 25%).

Fundamentally, Lloyds' recent results haven't shown any great improvement in terms of either revenue or assets. Meanwhile it's in the middle of an expensive restructuring program with an uncertain outcome.

Of greater concern is the company's susceptibility to economic shocks going forward. It barely passed the European Banking Authority's stress test earlier this year, and its prospects don't look amazing for the Bank of England's apparently more stringent version (with results to be announced by the end of the year). If the result is poor, the stock will probably suffer a hit.

All in all, Lloyds has been uninspiring this year as a stock and as a lender, and it's unlikely that'll change anytime soon.

the_motley_fool has no position in any stocks mentioned. Eric Volkman has no position in any stocks mentioned. Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Banco Santander, S.A. Stock Quote
Banco Santander, S.A.
$2.42 (-3.97%) $0.10
Barclays PLC Stock Quote
Barclays PLC
$7.08 (-5.98%) $0.45
Lloyds Banking Group plc Stock Quote
Lloyds Banking Group plc
$1.96 (-7.11%) $0.15
National Bank of Greece S.A. Stock Quote
National Bank of Greece S.A.

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

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