Bank stocks have performed extremely well over the past few years, so which ones are still worth buying? We asked three of our analysts which bank stocks are on their radar, and here is what they had to say.
Jordan Wathen: Signature Bank (NASDAQ:SBNY) tops my list as one of the best banks for the long haul because of its unique business model and corporate culture. It all starts with efficiency. The company's 27 offices manage about $900 million in assets on average, allowing it to spread costs better than virtually all of its competitors.
These cost savings allow it to spend on what truly matters: top-shelf talent. The company boasts the best compensation for its commercial bankers, paying more than any other competitor in the New York City area. As such, it grows by poaching experienced bankers from its rivals -- bankers who bring Signature millions of dollars of profitable loans and deposits on their first day of work.
And lest you think that this is a bank run entirely for the employees, think again. Despite its above-average pay, its efficiency ratio clocked in at an ultra-low 35% in the third quarter of 2014. High pay for its employees allows it to cut out many of the costs that plague most banks -- branches, advertising, and employee turnover, just to name a few.
Alas, its best-of-breed business model has the attention of Wall Street. Shares trade at about 21 times earnings, but with net income growing at an annual clip of 20% -- a rate that appears be sustainable for a long time to come -- I think it's more than worth the premium price.
Matt Frankel: I've been recommending bank stocks such as Citigroup and Bank of America, simply because I think they have an excellent risk-to-reward ratio. However, this time I'm going to go with my favorite bank that appears to make money regardless of what the market is doing: U.S. Bancorp (NYSE:USB).
Simply put, U.S. Bancorp is one of the best-run banks in the country, if not the best. At first glance, the bank's price-to-book ratio of 2.08 looks astronomically expensive when compared with peers such as Bank of America and Citigroup (both have price-to-book ratios of 0.82) and even Wells Fargo (1.73), which is considered to be pretty expensive itself.
However, while U.S. Bancorp isn't cheap, you get what you pay for. The bank produced very impressive third-quarter results, which included year-over-year loan growth of 6.3% and deposit growth of 7.4%. And U.S. Bancorp has sector-leading profitability and efficiency numbers, with a return on equity of 14.5% and an efficiency ratio of 52.4% (Wells Fargo's numbers were 13.1% and 57.7%, respectively).
So even though it isn't cheap and is trading at a 52-week high, it's very tough to make the case against owning U.S. Bancorp going into the new year.
Patrick Morris: Banks used to be cheap, but thanks to their remarkable run over the past few years, finding a good one to buy is easier said than done. But if I had to pick one, it'd be JPMorgan Chase (NYSE:JPM), and it turns out its valuation is the key driver.
Currently JPMorgan is trading at a price-to-tangible-book value -- a measure of what the market says it is worth versus what its actual on-balance sheet value is -- of 1.5, which places it much closer to the 1.3 multiple at Bank of America versus the 2.4 multiple Wells Fargo commands.
And frankly, this just doesn't make much sense.
Through the first nine months of 2014, the return on equity at JPMorgan Chase stands at 10%, and Wells Fargo has delivered an ROE of 13.6%. In other words, while Wells Fargo is 36% more profitable, it commands a 60% higher valuation premium.
And while it isn't an apples-to-apples comparison because Bank of America has been beset by settlements in 2014, its return on equity sat at 0.63% through the first nine months of the year. With that in mind, it's tough to justify JPMorgan Chase commanding such a similar valuation to it.
Put simply, despite the reality that JPMorgan Chase is among the best companies -- and not just banks -- in America, it is still trading at a remarkably fair price. And that is one reason it should be included as one bank stock to consider buying this December.
Jordan Wathen has no position in any stocks mentioned. Matthew Frankel owns shares of Bank of America. Patrick Morris owns shares of Bank of America and U.S. Bancorp. The Motley Fool recommends Bank of America and Wells Fargo and owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.