The first earnings season of 2015 wasn't particularly kind to banks. Several big names in the sector fell short of expectations in their quarterly results on the back of numerous factors. These included, but were certainly not limited to, higher legal costs, pronounced drops in trading revenue, and weakness in mortgage activity, among others.
As a result, many banking stocks have lagged behind the major stock indices so far this young year. But draggy share prices often mean bargains. With that in mind, three of our analysts have picked what they consider to be good stocks to buy in the sector this month.
Dan Caplinger: JPMorgan Chase (NYSE:JPM) had an impressive February, gaining almost 13% for the month as investors grew more optimistic about the bank's prospects. Yet the Wall Street financial giant could have more room to run higher, especially as March brings the annual look at major financial institutions known as the Federal Reserve stress tests.
Unlike some of its weaker peers, JPMorgan has been allowed to return more capital to shareholders in the form of dividends in recent years, as the Fed has judged its capital strength to be sufficient to allow larger dividend payments. Yet the threat of greater regulation has loomed large over the bank, and in response, JPMorgan has started working at moderating its size to avoid some of the more onerous oversight that could hamper its long-range prospects.
Earlier in February, JPMorgan said it would start charging major institutional clients to hold deposits at the bank, following a worldwide trend that has led to negative interest rates in Europe. In essence, JPMorgan is using its position to pick and choose the most profitable lines of business that involve the least friction from regulatory oversight, and with foreign markets offering all sorts of opportunities right now, JPMorgan looks like it could continue to prosper throughout 2015.
This online-only lender has no branches or proprietary ATMs. The resulting cost savings make it much more cost-efficient than its bricks-and-mortar rivals. BofI's efficiency ratio hovers around the 30% to 35% range; banks with assets over $1 billion average around 69%. So BofI can offer significantly higher deposit interest rates than those of more traditional competitors.
That's helped lift total deposits, which in turn has boosted net loans, which has raised total assets. Those three line items rose by 67%, 55%, and 46% year over year, respectively, in the second quarter.
In spite of the excellent quarter, BofI's stock price hasn't moved too far north. That might be because of uncertainty surrounding its pending acquisition of H&R Block's banking unit, which, after being announced last April, has yet to pass regulatory scrutiny. Or perhaps it's because of the company's just-announced flotation of new stock; no investor likes dilution.
I don't think either concern is serious enough to derail this train. BofI Holding is a lender on the move, and priced to rise. It's a great buy in the banking sector.
Matt Frankel: One bank stock that I think could do particularly well in March and beyond is Citigroup (NYSE:C). Now, I know some of my colleagues have an "unfavorable" opinion of Citigroup, but I truly believe it represents an excellent risk/reward at this price.
Specifically, the reason I like Citigroup in March is because this is the month when the stress test results are released. And I think Citigroup's improved capital levels will finally persuade regulators to allow for a long-awaited dividend increase.
Since last year, Citigroup's Basel III Tier I capital level has improved from 10.7% to 11.4%, and the Basel III supplementary leverage ratio has risen from 5.4% to 6%. Essentially, this means the bank is substantially better capitalized than it was last year, and many experts thought the bank was going to get the green light then.
Additionally, Citigroup has dramatically improved its asset quality over the last few years, and it continues to get rid of its unwanted "legacy" assets. Despite the improved asset quality and higher capital levels, shares still trade for a substantial discount to their intrinsic value.
So, with shares already trading at a "discount," the downside is somewhat limited, here, and even a small dividend increase could do wonders for the market's confidence in Citigroup.