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 13.1% over the past six months. At the same time, the S&P 500 was up 6.1%.
Although banks have produced good results, only a handful will thrive over the long term as fintech disruptors are rapidly taking market share from traditional institutions. Taking that into account, here are three bank stocks we’re passing on.
S&T Bancorp (STBA)
Market Cap: $1.70 billion
Tracing its roots back to 1902 in western Pennsylvania's industrial heartland, S&T Bancorp (NASDAQ: STBA) is a Pennsylvania-based bank holding company that provides retail and commercial banking services, cash management, trust services, and investment advisory solutions.
Why Are We Wary of STBA?
- 4.9% annual net interest income growth over the last five years was slower than its banking peers
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 3.8%
- Flat earnings per share over the last two years underperformed the sector average
S&T Bancorp’s stock price of $49.02 implies a valuation ratio of 1.2x forward P/B. Read our free research report to see why you should think twice about including STBA in your portfolio.
Ladder Capital (LADR)
Market Cap: $1.29 billion
Founded during the 2008 financial crisis when traditional lenders retreated from commercial real estate, Ladder Capital (NYSE: LADR) is a real estate investment trust that originates commercial real estate loans, owns commercial properties, and invests in real estate securities.
Why Are We Cautious About LADR?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 8.3% annually over the last two years
- Earnings per share decreased by more than its revenue over the last two years, showing each sale was less profitable
- Flat tangible book value per share over the last five years suggests it must find different ways to enhance shareholder value during this cycle
At $10.29 per share, Ladder Capital trades at 0.9x forward P/B. Check out our free in-depth research report to learn more about why LADR doesn’t pass our bar.
Bank of America (BAC)
Market Cap: $391.4 billion
Tracing its roots back to 1784 and now serving approximately 67 million consumer and small business clients, Bank of America (NYSE: BAC) is a global financial institution that provides banking, investing, asset management, and risk management products and services to individuals, businesses, and governments.
Why Does BAC Worry Us?
- Scale is a double-edged sword because it limits the firm’s growth potential compared to its smaller competitors, as reflected in its below-average annual net interest income increases of 8.2% for the last five years
- Net interest margin of 2% is well below other banks, signaling its loans aren’t very profitable
- Anticipated tangible book value per share growth of 6.6% for the next year implies profitability will be modest
Bank of America is trading at $57.80 per share, or 1.4x forward P/B. Dive into our free research report to see why there are better opportunities than BAC.
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