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The 3 Best Bank Stocks for an Aging Bull Market

Illustration by Andrew Colin BeckIllustration by Andrew Colin Beck
Illustration by Andrew Colin Beck

For bank shareholders, bad memories of the financial crisis are fading into history. Tax cuts, the likelihood of rising interest rates, and looming deregulation have made banks among the biggest winners in the Trump era. Over the past 12 months, while the broader stock market rose 16%, the S&P financials index rose 19%; in late January, that benchmark crossed the 500 mark for the first time since 2008.

Despite their winning streak, bank stocks still look attractive to cost-conscious investors. They trade at 13.6 times expected 2018 earnings, compared with 17 for the S&P 500, a wider-than-usual discount. Ian Sexsmith, portfolio manager at Parnassus Investments, says banks’ prices don’t reflect the potential impact of more consumer lending and lower default rates in a strong econ­omy—a mismatch that’s creating some enticing bargains.

Sexsmith particularly likes Signature Bank (SBNY), a New York City–based lender with a focus on small businesses and commercial real estate. Its profits and stock took a hit in 2016 and 2017, due to write-offs from a poorly timed earlier bet: Signature had become a major financier of permits for New York taxi drivers, just in time for the Uber era. But Sexsmith says Signature’s earnings-per-share growth—11% annually over the past five years on a compounded basis, even accounting for the taxi-permit stumble—shows management’s strength.

At the opposite end of the scale spectrum, many pros admire Bank of America (BAC), whose $2.3 trillion in assets make it about 50 times the size of Signature. Conor Muldoon of Causeway Capital Management says the bank is benefiting from a cost-cutting campaign that involved closing branches and making big tech investments—one that’s helping it expand more profitably in new markets. Though its share price has nearly doubled since Trump’s election, John Hancock senior managing director Lisa Welch points out that Bank of America’s P/E, at 11 times 2019 earnings, still trails its historical averages.

Foreign banks are also poised to benefit from a hotter econ­omy—and their stocks tend to be more affordable than those of their U.S. counterparts. Muldoon singles out London-based Barclays (BCS), which also trades on the New York Stock Exchange. The firm attributes 30% to 40% of its profits to the U.S., and trades at a bigger-than-average 75% discount to tangible book value. Regulators in the U.K., Barclays’s other major market, have signaled faster interest rate hikes, but “markets haven’t really focused on [Barclays] as a beneficiary” of such trends, Muldoon says. Still, Barclays recently announced plans to hike its 2018 dividends to 6.5% from 3%—another sign of a formerly beleaguered bank feeling bullish again.