By Philip van Doorn
Bank stocks have had a good run in 2021, but they still lag behind the broader market’s recovery since the pandemic doldrums of 2020. And now that the Federal Reserve seems likely to allow interest rates to rise soon, the banks may have an easier time improving their profits.
Below is a list of the best-performing U.S. banks over the past five years, based on returns on common equity.
During her recent discussion of stock-market strategy on CNBC, Savita Subramanian, the head of U.S. equity and quantitative strategy at Bank of America, said that small-cap stocks, especially energy and financial companies, were trading at compelling valuations and could give investors “more earnings yield for the same price.”
Here’s a recent screen of energy stocks .
Taking a broad look at forward price-to-earning valuations for the S&P 1500 Composite Index /zigman2/quotes/210600453/delayed XX:SP1500 -1.87% (made up of the large-cap S&P 500 /zigman2/quotes/210599714/realtime SPX -1.84% , the S&P 400 Mid Cap Index /zigman2/quotes/219506813/composite MID -2.87% and the S&P Small Cap 600 Index /zigman2/quotes/210599868/delayed SML -2.63% ), bank stocks are trading relatively cheaply:
The S&P 1500 bank industry group trades at a price-to-earnings ratio of 12.6, based on weighted consensus price-to-earnings estimates for the next 12 months among analysts polled by FactSet. The full S&P 1500 Composite Index trades at a forward P/E of 20.5. The average forward P/E for the banks over the past 15 years has been 12.5, while the average forward P/E for the full index has been 15.4.
So the banks now trade for 61% of the S&P 1500’s forward P/E valuation, while they have traded for 81% on average.
And that is despite the banks’ outperformance this year, returning 34%, while the S&P Composite 1500 has returned 20%.
A coming slowdown of bond purchases by the Federal Reserve is expected to push long-term interest rates higher, which for most banks will mean increased profitability, with wider spreads between rates on loans and those paid on deposits. The market has been anticipating the Fed’s change in policy, pushing yields on 10-year U.S. Treasury notes /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +0.48% to 1.49% early on Sept. 27 from 1.31% on Sept. 20.
Bank-stock screen — return on common equity
While Subramanian emphasized small-cap stocks, it seems reasonable to look at all bank stocks and find the ones with the best average returns on common equity. A screen on ROCE can work well within an industry such as banking, because the banks are required to hold minimum levels of capital, including common equity, by regulators. In other industries you may have healthy profitable companies that have negative equity. An example is McDonald’s Corp. /zigman2/quotes/203508018/composite MCD -0.48% , which had negative total shareholders’ equity of $5.8 billion as of June 30.
It also makes sense to include large banks in our screen because the biggest and most complex U.S. banks are required by regulators to hold more capital than smaller banks. If a big bank make makes the list, so be it: Its ROCE denominator is larger, so it has more of a hill to climb.
Starting with the Russell 3000 Index, which represents about 98% of U.S. stocks by market capitalization, we identified 229 banks. This includes some companies that are investment banks and/or brokers. The determining factor for a company such as Charles Schwab Corp. /zigman2/quotes/201281754/composite SCHW -3.53% , for example, is whether of not it files a bank or savings and loan holding company report with the Federal Reserve. If it does, it means the company is gathering deposits insured by the FDIC. Schwab does so through its subsidiary, Charles Schwab Bank SSB.
Looking back over the past 20 reported quarters through June 30, here are the 20 banks with the highest average returns on common equity. The list is limited to U.S. banks for which the data is available from FactSet for all of those quarters.
|Company||City||Market cap. ($mil)||Average ROCE – 20 quarters||Total return – 5 years|
|Ameriprise Financial Inc. /zigman2/quotes/203836224/composite AMP||Minneapolis||$30,871||27.66%||208%|
|American Express Co. /zigman2/quotes/203805826/composite AXP||New York||$139,598||22.95%||197%|
|MetroCity Bankshares Inc. /zigman2/quotes/204506337/composite MCBS||Doraville, Ga.||$530||22.80%||434%|
|Discover Financial Services /zigman2/quotes/208747867/composite DFS||Riverwoods, Ill.||$38,934||22.58%||153%|
|ServisFirst Bancshares Inc. /zigman2/quotes/202359054/composite SFBS||Birmingham, Ala.||$4,176||18.32%||216%|
|Synchrony Financial /zigman2/quotes/203661733/composite SYF||Stamford, Conn.||$28,616||18.07%||108%|
|Axos Financial Inc. /zigman2/quotes/202367185/composite AX||Las Vegas||$2,769||16.82%||108%|
|SVB Financial Group /zigman2/quotes/200548254/composite SIVB||Santa Clara, Calif.||$38,129||16.63%||493%|
|Western Alliance Bancorp /zigman2/quotes/206020866/composite WAL||Phoenix||$10,740||16.61%||188%|
|Hingham Institution for Savings /zigman2/quotes/207366000/composite HIFS||Hingham, Mass.||$738||16.46%||168%|
|Bank of Hawaii Corp. /zigman2/quotes/203515420/composite BOH||Honolulu||$3,301||15.64%||30%|
|Charles Schwab Corp. /zigman2/quotes/201281754/composite SCHW||Austin, Texas||$136,720||15.38%||162%|
|Preferred Bank /zigman2/quotes/210374414/composite PFBC||Los Angeles||$982||15.33%||106%|
|West Bancorp Inc. /zigman2/quotes/200986497/composite WTBA||West Des Moines, Iowa||$488||14.85%||74%|
|Stock Yards Bancorp Inc. /zigman2/quotes/202847090/composite SYBT||Louisville, Ky.||$1,468||14.35%||90%|
|Lakeland Financial Corp. /zigman2/quotes/202881627/composite LKFN||Warsaw, Ind.||$1,691||14.18%||110%|
|Flagstar Bancorp Inc. /zigman2/quotes/206662345/composite FBC||Troy, Mich.||$2,647||14.10%||83%|
|East West Bancorp Inc. /zigman2/quotes/206183036/composite EWBC||Pasadena, Calif.||$10,669||14.01%||127%|
|First Financial Bankshares Inc. /zigman2/quotes/206211358/composite FFIN||Abilene, Texas||$6,402||13.76%||165%|
|Raymond James Financial Inc. /zigman2/quotes/201697413/composite RJF||St. Petersburg, Fla.||$19,165||13.71%||160%|
Click on the tickers for more about each bank. The MarketWatch quote page can be an excellent start for your own research. Click here for Tomi Kilgore’s new, detailed guide to the wealth of information available for free on the quote page.
You can see that most of the banks on the list are relatively small, backing Subramanian’s preference for small-caps. But American Express Co. /zigman2/quotes/203805826/composite AXP -1.32% made the list, along with Schwab and credit card players Discover Financial Services /zigman2/quotes/208747867/composite DFS -3.00% and Synchrony Financial /zigman2/quotes/203661733/composite SYF -2.94% .
The right-most column contains total returns, with dividends reinvested, for the past five years through Sept. 24. In comparison, the S&P 1500 banking industry group returned 124% and the S&P Composite 1500 returned 111% over the same period.
Analysts’ price targets
Here’s the list again, in the same order, with a summary of analysts’ opinions, dividend yields and forward P/E ratios:
|Company||Share “buy” ratings||Closing price – Sept. 24||Consensus price target||Implied 12-month upside potential||Dividend yield||Forward P/E|
|Ameriprise Financial Inc. /zigman2/quotes/203836224/composite AMP||77%||$271.40||$292.50||8%||1.67%||11.9|
|American Express Co. /zigman2/quotes/203805826/composite AXP||45%||$175.72||$182.35||4%||0.98%||22.4|
|MetroCity Bankshares Inc. /zigman2/quotes/204506337/composite MCBS||0%||$20.80||$22.50||8%||2.31%||8.2|
|Discover Financial Services /zigman2/quotes/208747867/composite DFS||54%||$130.01||$136.22||5%||1.54%||10.4|
|ServisFirst Bancshares Inc. /zigman2/quotes/202359054/composite SFBS||0%||$77.05||$70.33||-9%||1.04%||20.4|
|Synchrony Financial /zigman2/quotes/203661733/composite SYF||77%||$50.23||$57.21||14%||1.75%||8.9|
|Axos Financial Inc. /zigman2/quotes/202367185/composite AX||88%||$46.65||$56.00||20%||0.00%||13.0|
|SVB Financial Group /zigman2/quotes/200548254/composite SIVB||61%||$649.96||$671.65||3%||0.00%||26.0|
|Western Alliance Bancorp /zigman2/quotes/206020866/composite WAL||92%||$103.07||$120.42||17%||1.36%||11.6|
|Hingham Institution for Savings /zigman2/quotes/207366000/composite HIFS||N/A||N/A||N/A||N/A||0.59%||N/A|
|Bank of Hawaii Corp. /zigman2/quotes/203515420/composite BOH||17%||$81.55||$90.80||11%||3.43%||15.9|
|Charles Schwab Corp. /zigman2/quotes/201281754/composite SCHW||63%||$75.59||$83.83||11%||0.95%||23.0|
|Preferred Bank /zigman2/quotes/210374414/composite PFBC||50%||$65.91||$73.00||11%||2.31%||10.4|
|West Bancorp Inc. /zigman2/quotes/200986497/composite WTBA||0%||$29.48||$32.00||9%||3.26%||10.8|
|Stock Yards Bancorp Inc. /zigman2/quotes/202847090/composite SYBT||25%||$55.23||$54.33||-2%||2.03%||17.8|
|Lakeland Financial Corp. /zigman2/quotes/202881627/composite LKFN||0%||$66.83||$63.67||-5%||2.04%||18.2|
|Flagstar Bancorp Inc. /zigman2/quotes/206662345/composite FBC||60%||$50.08||$62.75||25%||0.48%||7.8|
|East West Bancorp Inc. /zigman2/quotes/206183036/composite EWBC||83%||$75.20||$90.91||21%||1.76%||12.6|
|First Financial Bankshares Inc. /zigman2/quotes/206211358/composite FFIN||0%||$44.97||$45.33||1%||1.33%||30.3|
|Raymond James Financial Inc. /zigman2/quotes/201697413/composite RJF||82%||$93.13||$106.79||15%||1.12%||14.2|