This Bank Is Different

Vladimir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Most bank stocks have shown healthy growth this year. As the market becomes more and more elevated, the risks of a significant pullback increases. I’m moderately short-term bearish on many bank stocks this season as I think that although fundamentals are sound, the shares have gotten a little ahead of themselves. There is one bank that shows good dynamic, however – Bank of America (NYSE: BAC).

Rising net interest margin

Contrary to many of the big banks that reported results this earnings season, Bank of America has shown an increase in the net interest margin. It has improved by 1 basis point to 2.44% as compared to the first quarter of this year. The bank states that it continues to be asset-sensitive and its net interest income would benefit as rates move higher.

Other financial institutions see their margins trending lower. U.S. Bancorp (NYSE: USB), the only of the big banks to present a disappointing earnings report this season, saw its net interest margin decline from 3.48% to 3.43%.

Another big bank that recently reported its results, PNC (NYSE: PNC), reported that its net interest margin declined from 3.81% in the first quarter to 3.58% in the second quarter. PNC expects that its net interest margin will remain under pressure in the third quarter. The bank’s net interest income was down 5.5%, and it expects further pressure on loan yields.

Improvements in credit quality

Bank of America has stated that rising rates have already led to a 5% decrease in mortgage originations in June as the demand for refinancing wanes with the increase of interest rates. Asset quality continued to improve, however, and net charge-offs were down 16% in comparison with the first quarter. This trend is industry-wide. Net charge-offs were down more than 50% at PNC, although one-time issues affected this number and the pace is not likely to continue. U.S. Bancorp reported that net charge-offs declined 9.5%. As the banks improve their credit quality, the pace of the improvement is most likely to slow down.

At the current state of things, the market is more interested about growth than it is about “cheapness.” Bank of America seems to have the best prospects as it demonstrates improvements on all fronts. U.S. Bancorp and PNC show less momentum. PNC, for example, states that it would see modest growth in loans. Net interest income would be down modestly at the same time, while non-interest expense would tick up.

Valuation

Most banks continue to trade at low price-to-earnings ratios, and the abovementioned banks are not exceptions. Bank of America is trading at an 11.12 forward price-to-earnings ratio. U.S. Bancorp is trading at an 11.59 forward price-to-earnings ratio, while PNC is trading at an 11.11 forward price-to-earnings ratio. A notable thing is that Bank of America trades at 0.73 price-to-book ratio. The bank was hit hard during the financial crisis, and its shares have not recovered yet. PNC trades at 1.03 price-to-book ratio, and its shares have already reached pre-crisis levels. The same is true for U.S. Bancorp. Its shares have reached pre-crisis level and trade at 1.97 price-to-book ratio.

Bottom line

Bank of America is cheap and showing growth. It has just started returning cash to shareholders with a miniscule 0.27% dividend, but it’s just the beginning. Despite the fact that analysts’ mean target price for Bank of America is $14.53, suggesting a 1.5% downside, I think that the company's shares have a solid upside.

U.S. Bancorp, on the contrary, is pricey. The bank yields 2.47% and this could provide some support for the shares. Growth prospects for the bank are muted and its earnings report was mostly disappointing. PNC looks fairly valued, however. The company's stock yields 2.28% at current prices. The main risk for PNC shareholders is a pullback in the overall market, as I believe the company's stock would mostly perform in-line with general indices.

Many investors are terrified about investing in big banking stocks after the crash, but the sector has one notable stand-out. In a sea of mismanaged and dangerous peers, it rises above as "The Only Big Bank Built to Last." You can uncover the top pick that Warren Buffett loves in The Motley Fool's new report. It's free, so click here to access it now.

 


Vladimir Zernov has no position in any stocks mentioned. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America and PNC Financial Services. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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