While the broader market has largely recovered from the March selloff, the KBW Bank Index is down 37% this year. The downward shift comes even after the Federal Reserve said last month that the sector appears well-capitalized even under some of the most dire economic circumstances. Still, the Fed injected an extra dose of uncertainty by capping dividends and requiring that banks resubmit their capital plans later this year.
Bank investors hope to get some clarity next week when the sector begins to report second-quarter results
. This will be the first full quarter in which the sector has had to contend with swiftly rising unemployment as well banks’ handling of the Paycheck Protection Program.
Going into earnings, investors may want to scour the bank’s recent performance to identify potential opportunities. One way of doing this is to borrow from the playbook larger banks use when buying smaller players. The bigger banks will typically screen for banks that trade at or below their tangible book value
while also offering a healthy return on equity. Barron’s recently ran a screen of 42 of the largest banks in the U.S. on this criteria as a starting point for evaluating opportunities.
Not surprisingly, Wells Fargo (ticker: WFC) doesn’t rate well compared with other banks, as its shares have dropped 56% this year. It recently traded at 0.78 times its tangible book value, and its return on equity was 7.4%, below the 9.9% average of peers. The bank’s growth has been slowed due to a regulatory cap on assets, and investors expect Wells Fargo will be one of the few big banks to report a loss this quarter. Still, some analysts are hopeful that the San Francisco-based bank will soon stage a turnaround
.
By contrast, Morgan Stanley (MS) appears stronger and may still offer upside for investors. Price to tangible book value stands at 1.1, and its return on equity is 10.4%. The bank fared well following the Fed’s annual stress test due to expectations for its diverse revenue mix following its pending acquisition of E*Trade Financial (ETFC). Shares are down 7.4% this year.
. It trades below tangible book value but is expected to show strong capital-markets and trading activity in the second quarter, potentially offsetting any other weakness. Its shares are down 15% this year, outperforming more rate-sensitive big banks like JPMorgan Chase (JPM) and Bank of America (BAC)—both down roughly 35%—but lagging […]