Banks play a critical role in the financial system, providing everything from commercial loans to wealth management and payment processing services. Furthermore, economic conditions have supported loan growth and fee income, a trend that has enabled the banking industry to return 19.1% over the past six months. At the same time, the S&P 500 was up 9.1%.
Nevertheless, investors should tread carefully as many banks are cyclical due to their exposure to credit risk and regulatory changes. On that note, here are three bank stocks that may face trouble.
Preferred Bank (PFBC)
Market Cap: $1.10 billion
Founded in 1991 with a focus on serving the Pacific Rim community in Southern California, Preferred Bank (NASDAQ: PFBC) is a commercial bank that provides banking products and services to small and mid-sized businesses, entrepreneurs, real estate developers, and high net worth individuals.
Why Are We Hesitant About PFBC?
- 9.2% annual net interest income growth over the last five years was slower than its banking peers
- Net interest margin dropped by 76.5 basis points (100 basis points = 1 percentage point) over the last two years, implying the firm’s loan book profitability fell as competitors entered the market
- Earnings per share have dipped by 1.8% annually over the past two years, which is concerning because stock prices follow EPS over the long term
At $90.20 per share, Preferred Bank trades at 1.3x forward P/B. Check out our free in-depth research report to learn more about why PFBC doesn’t pass our bar.
CVB Financial (CVBF)
Market Cap: $2.84 billion
With roots dating back to 1974 and a focus on serving small and medium-sized businesses, CVB Financial (NASDAQ: CVBF) operates Citizens Business Bank, providing banking, lending, and trust services to businesses and individuals across California.
Why Do We Steer Clear of CVBF?
- Sales tumbled by 2% annually over the last two years, showing market trends are working against its favor during this cycle
- Net interest income trends were unexciting over the last five years as its 2% annual growth was below the typical banking firm
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
CVB Financial’s stock price of $20.93 implies a valuation ratio of 1.2x forward P/B. Read our free research report to see why you should think twice about including CVBF in your portfolio.
Citigroup (C)
Market Cap: $213.5 billion
With operations in nearly 160 countries and a history dating back to 1812, Citigroup (NYSE: C) is a global financial services company that provides banking, investment, wealth management, and payment solutions to consumers, corporations, and governments.
Why Do We Think Twice About C?
- Large revenue base makes it harder to expand quickly, and its annual net interest income growth of 6% over the last five years was below our standards for the banking sector
- Net interest margin of 2.4% reflects its high servicing and capital costs
- Annual tangible book value per share growth of 6.1% over the last two years lagged behind its banking peers as its large balance sheet made it difficult to generate incremental capital growth
Citigroup is trading at $122.20 per share, or 1x forward P/B. If you’re considering C for your portfolio, see our FREE research report to learn more.
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