In this article we present the list of 10 best bank stocks to buy right now according to hedge funds. Click to skip ahead and see the top 5 bank stocks to buy today.
You might feel like this is the absolute worst time to invest in bank stocks. Financial Select Sector SPDR Fund (XLF) is down nearly 6% year-to-date and some blue chip bank stocks are down even more. For example, Wells Fargo (WFC) is down 45% whereas Citigroup Inc (C) is down 26%. When you look at the S&P 500 Index you may feel like there is a big disconnect between the stock market and the U.S. economy, but bank stocks tell a different story because they work with small businesses and they are exposed to an economy wide slowdown. Wells Fargo is a very good example of this. It doesn’t generate any revenues from trading which is why it is down much more than other major banks like JP Morgan Chase (JPM) which generated nearly $7 billion revenue from fixed income and equity trading operations. If WFC can recover its 2020 losses, its share price will nearly double from its current levels.
Gator Capital talked about financial stocks in its October 2020 investor letter. Let’s take a look:
“The fundamental cause of poor performance for bank stocks this year is investors’ fear of credit risk. When the economy started to shut down in March, the floor dropped out from under bank stock prices. But, credit losses haven’t appeared in the banks’ financial statements so far. We think the banks are going to have significantly lower credit losses in this credit cycle compared to the GFC or the S&L Crisis in the early 1990s.
The main reason for lower credit losses is better underwriting during this cycle. We believe the bank regulators stopped banks from making many marginal loans. We also think the annual banking stress tests have forced banks to restrict risk taking. This has positioned banks with much lower risk loan portfolios than past cycles.
There are two wrinkles that make the low level of credit losses indistinct. First, loan forbearance and deferrals obscure how many customers are able to make payments. The bank regulators directed banks to generously grant loan forbearance and deferrals. Many customers took the offers of help even though they had the ability to pay. At the end of Q2, the median bank had 15% of their loan portfolios in deferral. This high level of deferral made it difficult for many investors to get comfortable with the underlying credit risk. Investors were unsure if large numbers of these customers were going to default and cause losses. During Q3, many banks gave updates on customer payment trends as deferrals expired. These banks report that the number of customers getting a second deferral dropped on average from mid-teens to mid-single-digit levels.”
Warren Buffett of Berkshire Hathaway
So, if Gator Capital’s assessment is correct, investors can outperform the market by a large margin by investing in stocks like Wells Fargo. At Insider Monkey we scour multiple sources to uncover the next great investment idea. We go through lists like the 10 best high dividend stocks to buy to identify solid dividend stocks trading at rock bottom prices. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox.
In this article we decided to take a look at the consensus bank stock picks of more than 800 hedge funds tracked by Insider Monkey. Here is our list of the 10 best bank stocks to buy according to hedge funds:
10. First Republic Bank (NYSE:FRC): $130.34
Number of Hedge Funds: 31
Total Value of HF Positions: $1.22 billion
2020 Return : 11.7%
Wedgewood Partners talked about FRC in its latest investor letter which we covered extensively in this article. Here is a short quote from that article:
“First Republic Bank was founded in 1985 on the idea that a culture of exceptional, concierge client service brought to bear on commodity banking and wealth management would lead to an exceptional business model. The founders were right. First Republic Bank is an exceptional growth company that happens to be in the lackluster banking industry. Starting in 1985 with $8.8 million de novo capitalization, the virtuous circle of high-touch, empowered client service coupled with low-turnover, experienced client-facing employees has led to equally low-turnover, referral-rich, satisfied clients. With just 78 banking offices (just 10 more since 2014) clustered in wealthy zip codes primarily in San Francisco, Palo Alto, Los Angeles, Santa Barbara, Newport Beach, and San Diego, California; Portland, Oregon; Jackson, Wyoming; Palm Beach, Florida; Boston, Massachusetts; Greenwich, Connecticut; and New York, New York, the Company has organically grown its deposit base to $99 billion and wealth management assets of $156 billion. Wealth management generates about 14% of overall Company revenues.
Over the past five years (2014—2019), the Company has generated compound growth of loans, deposits, Tier-1 capital, and wealth management assets of +19%, +19%, +16%, and +23%, respectively. In addition, over the same five years, the Company has compounded revenue growth at +15% per annum, tangible book value at +14% per annum, and earnings per share at +11% per annum. We believe that the Company has more than a few years of double-digit runway growth ahead of it.
In addition, the Company has long exhibited a parallel culture of extremely conservative lending, conservatively funded by a stable deposit base (84% of liabilities). Knowing its client well and knowing their respective loans well is exemplified by the fact that 90% of the Company’s real estate loans are within just 20 miles of a Company office. In addition, 90% of loans since the Company’s founding were originated by bankers still employed by the Company. Consistent across the Company’s loan portfolio are conservative loan-to-value ratios; high customer liquidity; and for individuals, high average FICO scores of 774. Consider this amazing statistic: since the Company’s founding in 1985, the Company has originated $288 billion in loans, yet cumulative loan losses have been just 0.12% ($289 million). Indeed, in the last reported quarter, the Company reported that nonperforming assets remained at a very low level – 13 basis points of total assets – and net charge-offs were just $1.1 million, or less than 1 basis point of average loans.”
9. HDFC Bank Limited (NYSE:HDB): $67.82
Number of Hedge Funds: 34
Total Value of HF Positions: $1.12 billion
2020 Return : 7%
HDB ranks ninth in our list of the best bank stocks to buy right now. HDB’s biggest holders in our database are billionaire Ken Fisher and Ryan Pedlow’s Two Creeks Capital. We previously covered Cooper Investors’ HDB thesis in this article:
“HDFC Bank is an Indian private bank established in 1994 that has become one of the premier financial institutions in Asia due to its unique culture and approach to business that honours both risk and entrepreneurship. This has produced a long track record of success including during periods of significant system-wide credit losses. This success has resulted in the stock becoming well-known among EM investors, typically trading at high multiples of book value that capitalise high perpetual growth expectations with minimal risk. Neither are appropriate assumptions for emerging market banks and so we were waiting patiently while the stock traded at levels where the risk adjusted value latency was not compelling.
The recent market panic addressed this valuation issue with emerging markets investors heading for the door at historic rates. This caused a significant drop in both the Indian Rupee (INR) and HDFC Bank shares, with the INR/USD declining by 6% and HDFC shares declining by over 40% in 2 months. This allowed us to invest at valuation levels around 2x book value, near their GFC lows. Notwithstanding the challenging environment India and HDFC are facing we remain long term optimists on both and expect HDFC to come through the other side in a position of strength, able to capitalise when growth resumes.”
8. Citizens Financial Group, Inc. (NYSE:CFG): $34.14
Number of Hedge Funds: 36
Total Value of HF Positions: $467 million
2020 Return : -11%
November has been good to bank stocks and CFG is up more than 25% so far this month. However, CFG shares are still down 11% year-to-date. It is the eighth best bank stock to buy according to hedge funds. Analysts expect CFG to earn slightly more than $2 per share for the current year. This isn’t bad at all given that we experienced the worst economic contraction of this century. When things get back to normal CFG can earn close to $4, giving it a forward PE ratio of less than 9. Billionaires Phil Gross and Steve Cohen are among CFG’s top three hedge fund holders.
7. The PNC Financial Services Group, Inc. (NYSE:PNC): $139.79
Number of Hedge Funds: 37
Total Value of HF Positions: $740 million
2020 Return : -8.8%
The seventh best banking stock to buy according to hedge funds is PNC Financial. Billionaires Daniel Sundheim and Warren Buffett are the top two holders of the stock. The stock came to our attention earlier this year when an insider purchased 1000 shares for $97. PNC shares are up more than 40% since that purchase, but they are still down 8.8% year to date.
Grace Capital’s Catherine Faddis said the following about PNC in a recent interview with CNBC:
“I think PNC is fantastic for a number of reasons. First of all it has announced deal to buy the U.S. assets of BBVA is a game changer. It gets PNC into the Sun Belt. It gets PNC Texas which is the crown jewel for banking assets and they’re going to get some great cost synergies out of the deal. Second thing i love about PNC is its ESG (environmental social and governmental) factors. PNC is simply put a great corporate citizen. They’ve pledged a billion dollars to help low-income communities and have pledged 30 million dollars just for COVID relief. Third thing about PNC is its deposit franchise. So you think about a bank you think it’s a commodity. They take in deposits, they make loans and that’s it. They get a little spread. No, not for PNC. For PNC almost half of its revenue comes from fees. That means its depositors like the bank. They do business with it. They’re not just parking their money there. They’re using asset management, insurance, other things to allow them to make a fee.
Last thing about PNC is valuation. Twelve percent return on equity which is great. Trading at under 1.2 times the book value. The price is right. The dividend yield is north of 3 percent. They’ve doubled their dividend in the last five years and the dividends should grow. So, buy PNC.”
6. Capital One Financial Corporation (NYSE:COF): $87.76
Number of Hedge Funds: 42
Total Value of HF Positions: $2.54 billion
2020 Return : -13.6%
Miller Value Partners talked about COF in their Q2 investor letter. Here is what they said:
“Capital One is a company we’ve admired for a long time. Bill used to own it in Value Equity. CEO and Founder Rich Fairbanks built an admirable technology-enabled franchise that started in credit cards and subsequently expanded broadly into other financial services. Superior technology is core to everything the company does (check out their great annual shareholder letter for details). Since the IPO in 1994, Capital One has compounded capital at 11.1% per year,5 vastly outperforming the S&P 500 Financial Index (7.6% per year) and the broad S&P 500 (9.9% per year), even in a challenging market for financials. The company ended 2019 with tangible book value per share of $84 and earned $11 per share. In the short-term, the recession will hit earnings. But the strong balance sheet ensures it can not only survive, but continue to invest in improving the business for the long term. We think the stock is quite attractive in the high $50s, where it trades for less than 70% of tangible book value, 5x trailing earnings (good “normalized level” off which it can grow) and a 2.8% dividend yield.”
Click to continue reading and see the 5 best bank stocks to buy right now.
Disclosure: None. 10 Best Bank Stocks To Buy Right Now is originally published at Insider Monkey.
