Banks use their capital and expertise to help businesses grow while offering consumers essential financial products like mortgages and credit cards. Still, investors are uneasy as banks face challenges from credit quality concerns and potential regulatory changes. These doubts have certainly contributed to banking stocks’ recent underperformance - over the past six months, the industry’s 6.1% gain has fallen behind the S&P 500’s 8.9% rise.
A cautious approach is imperative when dabbling in banks as many are sensitive to interest rate changes and economic cycles. Keeping that in mind, here are three bank stocks we’re steering clear of.
Merchants Bancorp (MBIN)
Market Cap: $2.56 billion
With a strategic focus on low-risk, government-backed lending programs, Merchants Bancorp (NASDAQCM:MBIN) is an Indiana-based bank holding company specializing in multi-family mortgage banking, mortgage warehousing, and traditional banking services.
Why Does MBIN Give Us Pause?
- 5.6% annual revenue growth over the last two years was slower than its banking peers
- Operational productivity has decreased over the last five years as its efficiency ratio worsened by 16.6 percentage points
- Insufficient tier one capital ratio of 9.4% leaves little margin for error in meeting regulatory liquidity requirements
At $55.77 per share, Merchants Bancorp trades at 1.2x forward P/B. To fully understand why you should be careful with MBIN, check out our full research report (it’s free).
Community Bank (CBU)
Market Cap: $3.5 billion
Tracing its roots back to 1866 in upstate New York, Community Financial System (NYSE: CBU) is a financial holding company that provides banking, employee benefits, wealth management, and insurance services to retail, commercial, and municipal customers.
Why Are We Cautious About CBU?
- 7.5% annual net interest income growth over the last five years was slower than its banking peers
- Incremental sales over the last five years were less profitable as its 4% annual earnings per share growth lagged its revenue gains
- Annual tangible book value per share declines of 1.4% for the past five years show its capital management struggled during this cycle
Community Bank is trading at $66.54 per share, or 1.6x forward P/B. Read our free research report to see why you should think twice about including CBU in your portfolio.
Bank of Hawaii (BOH)
Market Cap: $3.16 billion
Founded in 1897 as a financial anchor for the newly annexed Hawaiian territory, Bank of Hawaii (NYSE: BOH) is a financial institution providing banking, investment, and insurance services primarily to customers in Hawaii, Guam, and other Pacific Islands.
Why Are We Hesitant About BOH?
- Muted 3.8% annual net interest income growth over the last five years shows its demand lagged behind its banking peers
- Net interest margin of 2.5% is well below other banks, signaling its loans aren’t very profitable
- Incremental sales over the last five years were less profitable as its earnings per share were flat while its revenue grew
Bank of Hawaii’s stock price of $80.19 implies a valuation ratio of 2x forward P/B. If you’re considering BOH for your portfolio, see our FREE research report to learn more.
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