Banks play a critical role in the financial system, providing everything from commercial loans to wealth management and payment processing services. But worries about an economic slowdown and potential credit deterioration have kept sentiment in check, and over the past six months, the banking industry has tumbled by 7.1%. This drawdown was disheartening since the S&P 500 gained 1.1%.
Investors should tread carefully as many of these banks are also cyclical, and any misstep can have you catching a falling knife. Keeping that in mind, here are three bank stocks we’re passing on.
TowneBank (TOWN)
Market Cap: $2.40 billion
Founded in 1998 with a commitment to community-centered banking in the Hampton Roads region, TowneBank (NASDAQ: TOWN) is a community-focused financial institution providing banking, lending, and wealth management services to individuals and businesses in Virginia and North Carolina.
Why Are We Wary of TOWN?
- Net interest income trends were unexciting over the last four years as its 4.2% annual growth was below the typical bank company
- Net interest margin of 3% reflects its high servicing and capital costs
- Operational productivity has decreased over the last four years as its efficiency ratio worsened by 13.6 percentage points
TowneBank’s stock price of $32.78 implies a valuation ratio of 1.1x forward P/B. To fully understand why you should be careful with TOWN, check out our full research report (it’s free).
Texas Capital Bank (TCBI)
Market Cap: $3.48 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?
- 3.1% annual net interest income growth over the last four years was slower than its bank peers
- Weak unit economics are reflected in its net interest margin of 3.1%, one of the worst among bank companies
- Sales were less profitable over the last five years as its earnings per share fell by 21.5% annually, worse than its revenue declines
Texas Capital Bank is trading at $75.72 per share, or 1x forward P/B. If you’re considering TCBI for your portfolio, see our FREE research report to learn more.
BankUnited (BKU)
Market Cap: $2.54 billion
Born from the ashes of a failed Florida thrift during the 2009 financial crisis, BankUnited (NYSE: BKU) is a regional bank that provides commercial lending, deposit services, and treasury solutions to businesses and consumers primarily in Florida and the New York metropolitan area.
Why Is BKU Not Exciting?
- Muted 5% annual net interest income growth over the last four years shows its demand lagged behind its bank peers
- Weak unit economics are reflected in its net interest margin of 2.7%, one of the worst among bank companies
- Annual earnings per share growth of 1.8% underperformed its revenue over the last five years, showing its incremental sales were less profitable
At $33.76 per share, BankUnited trades at 0.8x forward P/B. Dive into our free research report to see why there are better opportunities than BKU.
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