Banks play a critical role in the financial system, providing everything from commercial loans to wealth management and payment processing services. But concerns about loan losses and tightening regulations have tempered enthusiasm, limiting the banking industry’s gains to 10.3% over the past six months. This return lagged the S&P 500’s 21.4% climb.
While some banks have strong balance sheets and diversified revenue streams that enable them to thrive in any environment, the odds aren’t great for the ones we’re analyzing today. Keeping that in mind, here are three bank stocks that may face trouble.
Simmons First National (SFNC)
Market Cap: $3.36 billion
With roots dating back to 1903 and a presence across Arkansas, Kansas, Missouri, Oklahoma, Tennessee, and Texas, Simmons First National (NASDAQ: SFNC) is a regional bank holding company that provides banking and financial services to individuals and businesses.
Why Do We Avoid SFNC?
- Net interest income trends were unexciting over the last five years as its 5.4% annual growth was below the typical banking firm
- Projected 17.8 percentage point efficiency ratio increase over the next year signals its day-to-day expenses will rise
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 4.5% annually while its revenue grew
Simmons First National is trading at $23.24 per share, or 0.9x forward P/B. If you’re considering SFNC for your portfolio, see our FREE research report to learn more.
Cathay General Bancorp (CATY)
Market Cap: $4.1 billion
Founded in 1962 with its first branch in Los Angeles' Chinatown, Cathay General Bancorp (NASDAQ: CATY) operates Cathay Bank, providing commercial banking services to businesses and individuals with a strong presence in Asian-American communities.
Why Does CATY Worry Us?
- 6.6% annual net interest income growth over the last five years was slower than its banking peers
- Earnings per share lagged its peers over the last two years as they only grew by 7.5% annually
- Estimated tangible book value per share growth of 9.5% for the next 12 months is soft and implies weaker profitability
Cathay General Bancorp’s stock price of $61.48 implies a valuation ratio of 1.3x forward P/B. To fully understand why you should be careful with CATY, check out our full research report (it’s free).
Bank of Hawaii (BOH)
Market Cap: $2.83 billion
Founded in 1897 as a financial anchor for the newly annexed Hawaiian territory, Bank of Hawaii (NYSE: BOH) is a financial institution providing banking, investment, and insurance services primarily to customers in Hawaii, Guam, and other Pacific Islands.
Why Is BOH Not Exciting?
- Muted 3.8% annual net interest income growth over the last five years shows its demand lagged behind its banking peers
- Inferior net interest margin of 2.5% means it must compensate for lower profitability through increased loan originations
- Earnings per share were flat over the last five years while its revenue grew, showing its incremental sales were less profitable
At $71.60 per share, Bank of Hawaii trades at 1.8x forward P/B. Read our free research report to see why you should think twice about including BOH in your portfolio.
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