Banking, finance, and taxes

Bank Stocks at Record Lows Relative to S&P 500: 4 to Buy Now

Lee Jackson

Published: April 8, 2020 6:27 am

Last Updated: July 14, 2020 8:45 am

When the market blew up during the global financial crisis of 2007 to 2009, the banks and brokerage stocks were ostensibly part of the reason for the collapse, as they had aided and abetted the mortgage crisis. Two major brokerage firms went out of business, and Bank of America bought Merrill Lynch at the last moment before it plunged into the abyss of bankruptcy.

Fortunately, lessons were learned then, and the major banks are in much better shape these days. In fact, representatives from the major banks met with the U.S. president recently and pledged support during the current crisis.

While net interest income will drop with rates at historically low levels, and loan growth will slow with the economy to all but shut down, the future is still bright for the top players in the industry. Many are trading at record low levels to their S&P 500 counterparts. We screened the Merrill Lynch banking research universe for companies rated Buy that paid solid dividends, and these four look like tremendous buys now.

Citigroup

This top bank is trading at the lowest levels since 2012, and it is the top Merrill pick in the sector. Citigroup Inc. (NYSE: C) has approximately 200 million customer accounts and does business in more than 160 countries and jurisdictions. It provides consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services and wealth management.

Trading at a still very cheap 7.2 times estimated 2020 earnings, this one looks very reasonable in what remains a pricey stock market.

Investors receive a 4.95% dividend. The Merrill price target for the shares is $60, but the Wall Street consensus target is $67. Citigroup stock closed trading on Tuesday at $41.25 a share.

Fifth Third Bancorp

This top super-regional bank is incredibly cheap right now. Fifth Third Bancorp (NASDAQ: FITB) is a diversified financial services company and the indirect parent company of Fifth Third Bank, an Ohio-chartered bank. It had $169 billion in assets and operated 1,207 full-service banking centers and 2,551 ATMs with Fifth Third branding in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia, Georgia and North Carolina.

Fifth Third is among the largest money managers in the Midwest. It had $399 billion in assets under care, of which it managed $46 billion for individuals, corporations and not-for-profit organizations through its Trust and Registered Investment Advisory businesses.

Things must be looking up at the bank as it announced this week it is hiring for nearly 1,000 positions in retail banking centers, mortgage and operations across its footprint, including a significant number in its Cincinnati headquarters market. Open roles are available across Fifth Third Bank’s 10-state footprint and include 500 positions in retail, 350 mortgage sales and support positions and 100 positions in operations.

Shareholders receive a 6.81% dividend. Merrill has a $25 price target, and the consensus target is $25.50. Fifth Third Bancorp stock was last seen trading at $15.86.

KeyCorp

This is another top bank that makes good sense for investors for the rest of 2020. KeyCorp (NYSE: KEY) operates as the bank holding company for KeyBank National Association, which provides deposit, lending, cash management and investment services to individuals, small and medium-sized businesses.

The company also provides a broad range of sophisticated corporate and investment banking products, such as merger and acquisition advice, public and private debt and equity, syndications and derivatives to middle market companies in selected industries throughout the United States under the KeyBanc Capital Markets banner.

Investors receive a monster 7.08% dividend. The $13 Merrill target price is less than the $16 consensus target. KeyCorp stock closed at $10.45, up over 5% on Tuesday.

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PNC Financial Services

This top regional bank is perhaps one of the best banking plays now. PNC Financial Services Group Inc. (NYSE: PNC) is one of the largest U.S. diversified financial services organizations and the seventh-largest U.S. bank by deposits, with $410 billion in assets.

PNC provides retail and business banking; residential mortgage banking; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; and wealth management and asset management. With consistent earnings growth and a very positive and growing loan portfolio, the company is a premiere super-regional bank stock to own.

Shareholders receive a 4.85% dividend. Merrill has set a price target of $112. The consensus is up at $127.33, but shares closed most recently at $94.92.

These four top U.S. banks are incredibly cheap, pay dividends that should remain intact, are rated Buy at and offer investors with a long-term time frame tremendous opportunity. Given the market’s recent rally, it may make sense to buy partial positions now and see how the first-quarter earnings come in.