Banks play a critical role in the financial system, providing everything from commercial loans to wealth management and payment processing services. Furthermore, economic conditions have supported loan growth and fee income, a trend that has enabled the banking industry to return 13.9% over the past six months, almost identical to the S&P 500.
Regardless of these results, investors must exercise caution as many banks are sensitive to interest rate fluctuations and economic cycles. With that said, here are three bank stocks we’re passing on.
Texas Capital Bank (TCBI)
Market Cap: $4.23 billion
Founded during the Texas banking renaissance of the 1990s with an entrepreneurial spirit, Texas Capital Bancshares (NASDAQ:TCBI) is a financial services firm that provides banking, wealth management, and investment banking services to businesses and individuals across Texas and beyond.
Why Do We Think Twice About TCBI?
- Annual net interest income growth of 2.1% over the last five years was below our standards for the banking sector
- Earnings per share lagged its peers over the last five years as they only grew by 7.8% annually
- Underwhelming 7.3% return on equity reflects management’s difficulties in finding profitable growth opportunities
At $92.62 per share, Texas Capital Bank trades at 1.2x forward P/B. To fully understand why you should be careful with TCBI, check out our full research report (it’s free for active Edge members).
TFS Financial (TFSL)
Market Cap: $3.99 billion
Tracing its roots back to 1938 during the Great Depression era when savings and loans were vital to homeownership, TFS Financial (NASDAQ:TFSL) is a savings and loan holding company that provides mortgage lending, deposit services, and other retail banking products primarily in Ohio and Florida.
Why Should You Sell TFSL?
- Net interest income trends were unexciting over the last five years as its 3.9% annual growth was below the typical banking firm
- Net interest margin of 1.7% is well below other banks, signaling its loans aren’t very profitable
- Earnings growth underperformed the sector average over the last five years as its EPS grew by just 2% annually
TFS Financial’s stock price of $14.32 implies a valuation ratio of 2.1x forward P/B. If you’re considering TFSL for your portfolio, see our FREE research report to learn more.
JPMorgan Chase (JPM)
Market Cap: $863.5 billion
Tracing its roots back to 1799 when its earliest predecessor was founded by Aaron Burr, JPMorgan Chase (NYSE:JPM) is a leading financial services company offering investment banking, consumer banking, commercial banking, and asset management services globally.
Why Are We Wary of JPM?
- Sizable revenue base leads to growth challenges as its 7.5% annual revenue increases over the last two years fell short of other banking companies
- Weak unit economics are reflected in its net interest margin of 2.6%, one of the worst among bank companies
- Estimated tangible book value per share growth of 7.4% for the next 12 months implies profitability will slow from its two-year trend
JPMorgan Chase is trading at $317.29 per share, or 2.5x forward P/B. Dive into our free research report to see why there are better opportunities than JPM.
Stocks We Like More
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