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After warming up to bank stocks in 2016 and 2017, investors turned cold on the industry in late 2018, selling off bank stocks in wholesale, fearing that interest rates were simply moving in the wrong direction for bank earnings. The good news? The recent sell-off punished all banks, good and bad, enabling investors to buy shares of well-run banks at prices not seen in more than a year.
Below, three Motley Fool contributors lay the case for buying shares of Bank of America (NYSE: BAC), Goldman Sachs (NYSE: GS), and First Republic Bank (NYSE: FRC).
Back to the basics
Jordan Wathen (Bank of America): The last year in bank stocks has made one thing very clear: Not all banks are created equal when it comes to their ability to court depositors, something that matters more now than it has at any point in the last decade. In recent months, all bank stocks have traded down, but among the hardest hit were banks that have no competitive advantage in attracting low-cost deposits. As rates rise, banks that don't have a real deposit franchise are forced to pay higher and higher rates, even though loan yields have barely budged.
Bank of America may very well be one of the best deposit gatherers in the business, capturing customers with features that go beyond the interest rates it pays on balances. Notably, the average rate it pays on deposits has increased very little, rising to just 0.55% in the third quarter of 2018, up from 0.30% a year earlier, despite four Fed rate hikes in between.
With the future for interest rates looking cloudier than it has in recent memory, Bank of America has "all-weather" appeal. Its income sources are roughly equally split between interest and noninterest businesses, and its low-cost deposit franchise enables it to earn large margins so long as interest rates are some amount greater than zero. Banks that aren't as good at bringing in low-cost deposits are forced to rely on a friendly yield curve to maintain their margins; Bank of America isn't one of them.
From Main Street to Wall Street, our favorite picks have varied business models. Image source: Getty Images.
An incredible institution at a major discount
Matt Frankel, CFP (Goldman Sachs): As we head into earnings season, many bank stocks are still beaten down after the stock market's plunge late last year. One in particular that has been on the top of my watch list for a while is Goldman Sachs, which, even after a recent rally, trades for a 14% discount to book value.
To be clear, Goldman certainly has its issues. The main reason why the bank has been such an underperformer recently is the uncertainty related to the "1MDB" scandal, which could result in billions in liabilities for the company.