Company / Analytics

Analytics, 29 September 2022

Bank stocks to consider for your portfolio

Banks stocks, like all other wall street and global stocks, have taken a beating so far in 2022. With stocks plummeting in the wake of continuously rising interest rates, the general consensus is that banks should be benefitting. This is because higher interest rates enable banks to generate better returns on their idle cash, increasing their profitability and improving their growth.

However, the financial sector has not benefitted much, and experts believe it is because the rates are rising too much, too quickly. For context, the Fed’s Target Fund Rate has gone from near 0% to 3.25% in a little over six months, which is one of the quickest rates of increase in its history. Raised interest rates, especially when implemented as has been the case this year, raise the risk of recession, which is terrible for banks. This is because financially strapped customers may stop paying their loans off, resulting in an increase in delinquencies. Additionally, if the economy is crumbling, it’s likely that loan volume will decline.

However, with current valuations, and interest rates set to remain high, an opportunity of undervalued bank stocks that provides investors with good buying opportunities for what can be considered a value stock. Below we analyze bank stocks that currently offer great value.

Canadian Imperial Bank of Commerce (CM)

The Canadian Imperial Bank of Commerce, or CIBC, is Canada’s fourth-largest bank that rebranded to CIBC in 2017 following the acquisition of a Chicago-based PrivateBancorp for $5.0 billion in cash and stock. The bank has gone ahead to generate up to 20% of all its income from its US business.

CIBC stocks offer a good opportunity firstly because it trades at a price-to-book ratio that is less than every other one of Canada’s major banks, including the National Bank of Canada along with the Big Five, and yields a high 5.4%. The price-to-book ratio is calculated by dividing the company’s stock price per share by its book value per share (BVPS). This financial ratio is used to compare a firm’s market capitalization to its book value. The lower a company’s price-to-book ratio is, the better a value it generally is. This can be especially true if a stock’s book value is less than one, meaning that it trades for less than the value of its assets. Buying such a stock provides value for investors by creating a margin of safety.

Value investors will also find it an undervalued stock trading at just 8.7 times earnings. It’s also near oversold territory trading at 34 on the relative strength index. Analysts from market watch have also set a price target of $65.42, representing a 47% upside to where the stock is currently trading. That, combined with the fact that CIBC stock and the Big Six Banks have all historically recovered within a year of such a downturn, makes CIBC an obvious selection for this article.

Goldman Sachs (GS)

Goldman Sachs is a global pioneer Investment bank that has been around for more than 100 years and remains one of the largest financial services firms in the world. This year, it ranks second in investment banking revenue behind only JPMorgan Chase. The two have consistently ranked at or near the top, by most metrics, over the years. Goldman Sachs has over the years maintained its top-notch track record when it comes to risk management and capital allocation, a factor that has compelled us to add it to this list.

Goldman Sachs’ current market value means it qualifies as a value stock. The GS stock is down 22% in 2022, but it currently has a dividend yield of 3.3%. The shares are fairly undervalued, changing hands for 7.87 times forward earnings and currently standing at a 1.0-time book value. Its net revenue also fell 23% YOY to $11.86 billion, while its EPS fell to $7.73, compared with $15.02 in the second quarter of 2021. Even with the stock price down, Goldman Sachs is trading at about $298 per share – up 121% from the low point at the start of the pandemic, when it hit $135 in March 2020. Before the pandemic, Goldman Sachs hit its 52-week high of $250 per share in January 2020, and its stock price is still up 19.3% since then.

Another factor that places it as a good investment among bank stocks is Wall street’s confidence in the stock, with Wall Street analysts setting a median price forecast for GS stands at $376.50.

The financial investment bank also announced that it would start offering Transaction Banking (TxB) in the European Union. The unit will provide the bank’s European clients with a variety of new services, including deposits and payments. This could further drive the price up with yields expected to rise.

Investor note

It is however important for investors to note the current global economic situation still remains unpredictable for the most part. Given the economic forecast, These stocks may continue to tread water and perhaps even dip lower over the next few quarters. But a good sign of their resiliency is that the companies have fared relatively well through the first three quarters of the year.

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