Banks serve as the backbone of the economy, facilitating lending, deposits, and financial services that keep businesses and consumers moving forward. But concerns about loan losses and tightening regulations have tempered enthusiasm, limiting the banking industry’s gains to 10.1% over the past six months. This return lagged the S&P 500’s 14.1% climb.

While some banks have strong balance sheets and diversified revenue streams that enable them to thrive in any environment, the odds aren’t great for the ones we’re analyzing today. On that note, here are three bank stocks we’re steering clear of.

OceanFirst Financial (OCFC)

Market Cap: $1.11 billion

Tracing its roots back to 1902 when it began serving coastal New Jersey communities, OceanFirst Financial (NASDAQ: OCFC) operates as a regional bank holding company that provides commercial and consumer banking services primarily in New Jersey and surrounding metropolitan areas.

Why Is OCFC Risky?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 5% annually over the last two years
2. Net interest income trends were unexciting over the last five years as its 3.1% annual growth was below the typical banking firm
3. Incremental sales over the last five years were less profitable as its 1.2% annual earnings per share growth lagged its revenue gains

At $19.33 per share, OceanFirst Financial trades at 0.7x forward P/B. To fully understand why you should be careful with OCFC, check out our full research report (it’s free for active Edge members).

Byline Bancorp (BY)

Market Cap: $1.34 billion

Ranking as the fifth most active Small Business Administration lender in the country, Byline Bancorp (NYSE: BY) is a Chicago-based bank that provides banking services to small and medium-sized businesses, commercial real estate developers, and consumers.

Why Is BY Not Exciting?

1. Muted 7.7% annual revenue growth over the last two years shows its demand lagged behind its banking peers
2. Concessions to defend its market share have ramped up over the last two years as its net interest margin decreased by 21.3 basis points (100 basis points = 1 percentage point)
3. Annual earnings per share growth of 2.3% underperformed its revenue over the last two years, showing its incremental sales were less profitable

Byline Bancorp’s stock price of $29.18 implies a valuation ratio of 1.1x forward P/B. Dive into our free research report to see why there are better opportunities than BY.

PennyMac Financial Services (PFSI)

Market Cap: $6.80 billion

Founded during the 2008 financial crisis to help address the mortgage market meltdown, PennyMac Financial Services (NYSE: PFSI) is a specialty financial services company that originates, services, and manages investments related to residential mortgage loans in the United States.

Why Does PFSI Give Us Pause?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 6.9% annually over the last five years
2. 7.1% annual net interest income growth over the last five years was slower than its banking peers
3. Earnings per share have contracted by 4.7% annually over the last five years, a headwind for returns as stock prices often echo long-term EPS performance

PennyMac Financial Services is trading at $130.92 per share, or 1.6x forward P/B. Check out our free in-depth research report to learn more about why PFSI doesn’t pass our bar.

Stocks We Like More

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