Analysts think these undervalued bank stocks will benefit from a recovery.
Bank stocks are back on the upswing. The financials sector paused this summer as the inflation narrative slowed a bit and the Delta variant picked up steam. However, the huge July jobs number has reminded the market that the economy is still running hot. That generally means that rate hikes from the Federal Reserve are on the horizon. Rising interest rates tend to lead to larger profit margins for banking firms. Several banking stocks hit new 52-week highs following the unemployment data and concurrent surge in interest rates. Despite the category’s hot streak, here are eight of the best bank stocks to buy now that still trade at bargain prices.
Citigroup Inc. (ticker: C)
Citigroup has been on a self-improvement campaign in recent years. Citi has exited various non-core international markets in recent years and just announced a deal to sell its Australian consumer business this week. The bank intends to raise its profit margins by refocusing on its core lines of business. Meanwhile, the company is flush with cash between its asset sales and strong underlying profitability. This will allow Citigroup to return as much as $28 billion in capital to shareholders over the next year. That’s a huge figure, amounting to roughly 20% of Citigroup’s current market capitalization. With Citigroup buying back a ton of stock, that should supercharge earnings growth and help further rally shares. Morningstar’s U.S. bank analyst, Eric Compton, sees further upside for Citigroup with fair value currently estimated to be $78 per share.
Huntington Bancshares Inc. (HBAN)
Thanks to a series of large mergers and acquisitions, Huntington Bancshares has become one of the nation’s largest regional banks. The bank grew its footprint once again this summer, adding Minnesota-based TCF Bank to the fold. Huntington has a track record of successfully executing large mergers and pulling off major cost savings from these franchises. Over the next few years, Huntington should achieve similar benefits from the nearly 500 TCF branches that it just purchased. This should pave the way for additional earnings growth and, in turn, a higher share price. Morningstar says that Huntington shares are undervalued by nearly 20%; its analyst sees the stock moving to $18 per share.
M&T Bank Corp. (MTB)
M&T is a large regional bank. It focuses primarily on commercial real estate lending in the Northeast. Morningstar’s Compton calls M&T’s management team excellent and has a price target of $156 for M&T Bank, which represents more than 10% upside from here. The bank is highly sensitive to interest rates given the nature of its lending specialty. Thus, in a rising interest rate environment, M&T Bank should have more upside potential. It should also benefit strongly from the improving economy as some analysts had worried about what could happen to its commercial real estate exposure in a prolonged recession. Thankfully, that risk now seems to be off the table.
Truist Financial Corp. (TFC)
Truist is a newly formed Southeastern regional bank that came about from the merger of BB&T and SunTrust banks. Morningstar rates Truist with four stars out of five and sees it as moderately undervalued. While the bank may not appear to be particularly cheap based on current earnings, Morningstar’s analyst believes that the merger of BB&T and SunTrust will unlock substantial cost savings and revenue synergies across the combined firm’s investment banking and insurance brokerage arms. While Truist is not the most heavily discounted bank today, Morningstar sees it as a “top performer” in coming years as it continues to unlock merger benefits through at least 2023.
Wells Fargo & Co. (WFC)
Wells Fargo is well into its turnaround. Shares had collapsed from the one-two punch of its accounts scandal and the pandemic. However, Wells Fargo brought in a world-class new CEO and is working to rectify its past behavior. In the meantime, its business is performing excellently. Wells Fargo had one of the strongest earnings reports of the major banks this earnings season. In the longer term, Wells Fargo is working to cut $8 billion in annual overhead from its bloated cost base. This should give the bank plenty of earnings growth potential in coming years. As for shares today, even after the big run-up recently, Morningstar’s Compton sees further upside for Wells Fargo. He puts fair value at $55 per share, which would be approximately 10% additional upside from here.
JPMorgan Chase & Co. (JPM)
Simply put, JPMorgan Chase is currently the best-in-class national bank. It’s the largest U.S. money center bank, with more than $3 trillion in assets, and it also happens to be one of the best-managed as well. JPMorgan has incredible scale in both consumer and investment banking. This offers it numerous competitive advantages against its smaller rivals. Technology, for example, is becoming increasingly important to banks, and JPMorgan’s more than $10 billion annual tech budget gives it access to tools that most other banks simply can’t match. Trading at 12 times earnings, Morningstar’s Compton sees JPMorgan shares as fairly valued today. JPMorgan isn’t the cheapest bank out there by any means, but there’s nothing wrong with buying a premium quality firm at a reasonable price either.
Banco Santander S.A. (SAN)
Turning to foreign banks, Morningstar’s Johann Scholtz sees Santander as a top option with fair value at $4.50. That’s nearly 15% upside from here. The Spanish banking empire is starting to recover nicely from the pandemic. It posted 8% overall revenue growth in the first half of the year, which is strong by European banking standards. The bank’s Latin American division is starting to turn the corner as well, with credit quality figures improving dramatically. The bank’s payments division in Brazil also shows considerable promise. Overall, Santander has more consistent profitability than most European banking peers due to its broad diversification throughout Latin America. If the commodity boom continues to pick up steam and boost local economies, Santander could really surprise some folks.
Bancolombia S.A. (CIB)
Speaking of the commodity boom, Bancolombia has exposure to a few in-demand exports. It is the largest bank in Colombia, and controls a quarter of that country’s market share. It also has considerable operations in Central America. Bancolombia shares remain down by about 40% since the pandemic began. However, that could quickly change. Colombia’s top export, crude oil, has come surging back to life. Its other key products such as coffee and fresh cut flowers are also seeing better pricing and demand as the world economy reopens. Bancolombia shares haven’t caught wind of the improving macroeconomic conditions yet, thus offering opportunity. Shares trade at just eight times estimated 2022 earnings. Morningstar’s quantitative ratings tool pegs Bancolombia’s fair value at $36 per share, about 15% upside from current levels.
Best bank stocks to buy for 2021
— Citigroup Inc. (C)
— Huntington Bancshares Inc. (HBAN)
— M&T Bank Corp. (MTB)
— Truist Financial Corp. (TFC)
— Wells Fargo & Co. (WFC)
— JPMorgan Chase & Co. (JPM)
— Banco Santander S.A. (SAN)
— Bancolombia S.A. (CIB)
More from U.S. News
Update 08/13/21: This story was published at an earlier date and has been updated with new information.