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’s 4.8% return has trailed the S&P 500 by 6.7 percentage points.
A cautious approach is imperative when dabbling in banks as many are sensitive to interest rate changes and economic cycles. With that said, here are three bank stocks we’re passing on.
First Busey (BUSE)
Market Cap: $2.12 billion
Tracing its roots back to 1868 during America's post-Civil War reconstruction era, First Busey (NASDAQ: BUSE) is a bank holding company that provides commercial and retail banking, wealth management, and payment technology solutions across Illinois, Missouri, Florida, and Indiana.
Why Are We Wary of BUSE?
- Inferior net interest margin of 3.2% means it must compensate for lower profitability through increased loan originations
- Earnings per share were flat over the last two years while its revenue grew, showing its incremental sales were less profitable
- Forecasted tangible book value per share decline of 4.6% for the upcoming 12 months implies profitability will deteriorate significantly
At $23.87 per share, First Busey trades at 1x forward P/B. Read our free research report to see why you should think twice about including BUSE in your portfolio.
Frost Bank (CFR)
Market Cap: $8.61 billion
Tracing its roots back to 1868 when it was founded during Texas's post-Civil War reconstruction era, Cullen/Frost Bankers (NYSE: CFR) operates Frost Bank, a Texas-based financial institution providing commercial and consumer banking, wealth management, and insurance services.
Why Are We Cautious About CFR?
- 4.9% annual revenue growth over the last two years was slower than its banking peers
- Incremental sales over the last two years were much less profitable as its earnings per share fell by 3.6% annually while its revenue grew
- Tangible book value per share is projected to decrease by 6.4% over the next 12 months as capital generation weakens
Frost Bank is trading at $134.65 per share, or 2x forward P/B. To fully understand why you should be careful with CFR, check out our full research report (it’s free for active Edge members).
AGNC Investment (AGNC)
Market Cap: $11.86 billion
Born during the 2008 financial crisis when mortgage markets were in turmoil, AGNC Investment (NASDAQ: AGNC) is a real estate investment trust that primarily invests in mortgage-backed securities guaranteed by U.S. government agencies or enterprises.
Why Do We Think AGNC Will Underperform?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 51.9% annually over the last five years
- Earnings per share have dipped by 9.5% annually over the past five years, which is concerning because stock prices follow EPS over the long term
- Loan losses and capital returns have eroded its tangible book value per share this cycle as its tangible book value per share declined by 12.2% annually over the last five years
AGNC Investment’s stock price of $11.06 implies a valuation ratio of 1.2x forward P/B. Check out our free in-depth research report to learn more about why AGNC doesn’t pass our bar.
Stocks We Like More
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