Please ensure Javascript is enabled for purposes of website accessibility

4 Best Bank Stocks to Buy During a Correction

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

With the markets in a correction, it's a great time to go shopping for bargains.

The stock market has been beaten down lately, with major indices at or near correction levels, and bank stocks have not been immune from the pain. Even after the recent rebound, the financial sector is down more than 8% since peaking in late July.

With that in mind, we asked four of our analysts to share their top bargains in banking. Here's what they had to say.

XLF Chart

Matt Frankel: If this correction continues, one bank stock I'll consider buying more of is Bank of America (BAC 2.32%). After the bank's atrocious performance during the financial crisis, it may seem like a silly idea to buy more if things start to go bad. So, why on Earth would I suggest it?

Simply put, Bank of America is a different bank than it was just a few years ago. Its credit rating was recently upgraded by all three major rating agencies, which could potentially save the bank billions of dollars in borrowing expenses each year. The majority of crisis-era legal expenses are in the past, and a recent legal decision actually trimmed $7.6 billion from the bank's outstanding legal costs. Further, the bank is finally producing profits in the realm of what investors expect from big banks -- its 0.99% return on assets (ROA) for the second quarter is just shy of the coveted 1% level.

Finally, the bank has projected that its net interest income could grow by $4.6 billion once interest rates normalize.

Bank of America trades for a 24% discount to book value, which makes it extremely cheap already, and analysts are expecting it to produce 2015 earnings of $1.61 per share -- its best performance since before the financial crisis. So, it could be an excellent time to pick up cheap shares of this much-improved banking giant.

Todd Campbell: The last thing you want to do during tough economic times is boost your exposure to banks with loans likely to default. Instead, focusing on banks like New York Community Bancorp (NYCB 2.38%) that have loan portfolios more insulated to economic busts is best when markets sour.

New York Community Bancorp generates the vast majority of its revenue and profit from loans issued to multifamily apartment projects in New York City, and many of these loans are for rent-controlled apartments that typically see an uptick in demand during a recession. As a result, during the four years surrounding the Great Recession, the net charge-off rate for New York Community Bancorp's loans was a meager 37 basis points, and that was miles better than the 8.03% charge-off rate at its savings and loans peers.

Additionally, Because New York Community Bancorp focuses on big loans rather than pricey branch offices, it has fewer expenses and more money to return to investors via dividends than peers. With a rock-solid loan portfolio that could hold up during a slide and a healthy 6% dividend yield, you can see why this my favorite bank to own in a correction. 

Sean Williams: You'll be hard-pressed to find protection from a correction in the financial sector, but if my arm were twisted, I'd suggest investors take a closer look at U.S. Bancorp (USB 1.86%).

The selection is a bit odd if you think about it, because U.S. Bancorp is the most expensive of the big banks by price-to-book value. But, as my Foolish colleague John Maxfield recently pointed out, there is a direct and reasonable correlation between valuations and profitability among bank investors. U.S. Bancorp has the highest return on equity over the trailing-12-month period than any other big bank, making it a solid choice to be the sector's "most expensive" on a book value basis.

One reason U.S. Bancorp remains a leader, and has been one of the strongest performers since the Great Recession, is its keen ability to avoid risky investments. U.S. Bancorp was never lured in by derivatives and other trades that crashed and burned for some of its peers. Instead, U.S. Bancorp focuses on simple loan and deposit growth, as well as improving its image with consumers (something that hasn't been hard since it's kept its name out of the headlines).

U.S. Bancorp's second-quarter results echo its focus on basic banking services. Average total loans increased 4%, trust and investment management fees rose better than 7%, average total deposits increased nearly 9%, and net charge-offs and nonperforming assets both fell by a double-digit percentage on a year-over-year basis. Tack on a reasonable 2.3% dividend yield, and you have ample positives that could buoy this stock.

Jason Hall: Over the past few decades, there have been several banking crises, and the only major bank to have come through each of them unscathed has been Wells Fargo & Co (WFC 3.35%). The latest banking crisis, of course, was at the very heart of the Great Recession, and it saw many banks -- big and small -- collapse.

Wells did end up taking on some government capital as part of the bank "bailout" funds program in October 2008, but by December 2009, it had already repaid the $25 billion in federal assistance with minimal impact to shareholders.

Most importantly, Wells was able to not only navigate the biggest banking crisis in nearly 30 years relatively unscathed, but came out of it bigger and stronger by acquiring Wachovia in 2008, significantly increasing its presence in the eastern U.S.

The bottom line about bank investing is that a proven track record of low-risk lending, and a management culture that fosters and rewards that behavior, is more important than chasing profits or growth. Wells Fargo has for years been an excellent bank -- and a dependable investment -- for this very reason. I can't think of another bank I'd rather buy in a market correction. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Bank of America Corporation Stock Quote
Bank of America Corporation
$36.67 (2.32%) $0.83
Wells Fargo & Company Stock Quote
Wells Fargo & Company
$45.60 (3.35%) $1.48
New York Community Bancorp, Inc. Stock Quote
New York Community Bancorp, Inc.
$9.91 (2.38%) $0.23
U.S. Bancorp Stock Quote
U.S. Bancorp
$52.14 (1.86%) $0.95

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.