Banks use their capital and expertise to help businesses grow while offering consumers essential financial products like mortgages and credit cards. Still, investors are uneasy as banks face challenges from credit quality concerns and potential regulatory changes. These doubts have certainly contributed to banking stocks’ recent underperformance - over the past six months, the industry’s 7.8% gain has fallen behind the S&P 500’s 21.1% rise.

Investors should tread carefully as many of these banks are also cyclical, and any misstep can have you catching a falling knife. On that note, here are three bank stocks we’re steering clear of.

SouthState (SSB)

Market Cap: $9.71 billion

With roots dating back to the Great Depression era of 1933, SouthState (NYSE: SSB) is a financial holding company that provides banking services, wealth management, and correspondent banking services across six southeastern states.

Why Does SSB Worry Us?

1. Estimated net interest income growth of 3.4% for the next 12 months implies demand will slow from its five-year trend
2. Anticipated 2.6 percentage point rise in its efficiency ratio suggests its expenses will increase as a percentage of revenue
3. Performance over the past five years shows its incremental sales were less profitable, as its 6.5% annual earnings per share growth trailed its revenue gains

SouthState is trading at $100.11 per share, or 1x forward P/B. Read our free research report to see why you should think twice about including SSB in your portfolio.

Community Bank (CBU)

Market Cap: $3.15 billion

Tracing its roots back to 1866 in upstate New York, Community Financial System (NYSE: CBU) is a financial holding company that provides banking, employee benefits, wealth management, and insurance services to retail, commercial, and municipal customers.

Why Are We Wary of CBU?

1. Net interest income trends were unexciting over the last five years as its 7.5% annual growth was below the typical banking firm
2. Incremental sales over the last five years were less profitable as its 4% annual earnings per share growth lagged its revenue gains
3. Annual tangible book value per share declines of 1.4% for the past five years show its capital management struggled during this cycle

At $59.80 per share, Community Bank trades at 1.5x forward P/B. Dive into our free research report to see why there are better opportunities than CBU.

First Citizens BancShares (FCNCA)

Market Cap: $23.04 billion

With roots dating back to 1898 and a significant expansion through its 2023 acquisition of Silicon Valley Bank, First Citizens BancShares (NASDAQGS:FCNC.A) is a bank holding company that provides financial services to individuals and businesses through its First-Citizens Bank & Trust Company subsidiary.

Why Is FCNCA Not Exciting?

1. Sales tumbled by 2.9% annually over the last two years, showing market trends are working against it during this cycle
2. 63.1 basis point (100 basis points = 1 percentage point) decline in its net interest margin over the last two years reflects the firm’s willingness to accept lower profitability to defend its market position
3. Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term

First Citizens BancShares’s stock price of $2,073 implies a valuation ratio of 1.1x forward P/B. Check out our free in-depth research report to learn more about why FCNCA doesn’t pass our bar.

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