It’s been a rough 2023 for the banking industry, with three notable regional banks collapsing and the KBW Nasdaq Bank stock Index plunging 18%.
But don’t give up on the sector, says Morningstar analyst Eric Compton. The Federal Reserve’s recent stress tests show the industry remains healthy, although more regulations are likely coming in the months ahead, he said.
“Our key takeaway is that the banking system remains well capitalized,” Compton said. “The system has enough capital to handle a severe recession and not only survive but also continue to lend to and support the economy. From a capital perspective, the system is healthy.”
Morningstar compiled a list of eight bank stocks to which Morningstar assigns a moat (competitive advantage) and which are undervalued compared to Morningstar’s fair value estimates.
The Winners
Here they are, starting with the most undervalued as of July 6.
1. Comerica (CMA) -). Morningstar moat rating: narrow. Morningstar fair value estimate: $76. Monday’s closing price: $48.06.
“While earnings growth is coming to a halt, Comerica has been one of the biggest beneficiaries of the current higher rate backdrop, with returns on tangible equity hitting the high-20s,” Compton wrote.
“The flip side of this business model, though, is that the bank can be pressured during periods of low rates, although management has put on additional hedges to limit this volatility.”
2. Truist Financial (TFC) -). Morningstar moat rating: narrow. Morningstar fair value estimate: $54. Monday’s closing price: $33.43.
Truist was produced by the merger of BB&T and SunTrust in 2019. “We think the combination has formed one of the better regional banks in the U.S.,” Compton wrote.
“Truist boasts some of the best scale among the U.S. regional banks, and the bank has a uniquely complete platform across retail, commercial, advisory, wealth, and insurance.”
3. U.S. Bancorp (USB) -). Morningstar moat rating: wide. Morningstar fair value estimate: $53. Monday’s closing price: $35.26.
U.S. Bancorp is the largest regional bank. It also has been “one of the most profitable,” Compton wrote. “Few domestic competitors can match its operating efficiency and returns on equity over the past 15 years.”
His only complaint: the bank has “had a hard time further optimizing efficiency and returns while some peers seem to be gradually catching up.”
4. Wells Fargo (WFC) -). Morningstar moat rating: wide. Morningstar fair value estimate: $61. Monday’s closing price $44.74.
5. Huntington Bancshares (HBAN) -). Morningstar moat rating: narrow. Morningstar fair value estimate: $15. Monday’s closing price: $11.40
6. PNC Financial Services Group (PNC) -). Morningstar moat rating: narrow. Morningstar fair value estimate: $175. Monday’s closing price: $127.16.
7. M&T Bank (MTB) -). Morningstar moat rating: narrow. Morningstar fair value estimate: $169. Monday’s closing price: $131.35.
8. Bank of America (BAC) -). Morningstar moat rating: wide. Morningstar fair value estimate: $35. Monday’s closing price: $29.40.
The author of this story owns shares of U.S. Bancorp and Bank of America.
