Banks benefit from rising interest rates as they enjoy higher interest margins. However, not all bank stocks are well-positioned to capitalize on the rising interest rate environment. Despite the industry tailwinds, weak profitability, and higher-than-industry valuation of First Republic Bank (FRC), Signature Bank (SBNY), Webster Financial (WBS), and SVB Financial (SIVB) make them top stay-away-from bank stocks now. Read more….
Major benchmark indexes failed to sustain July’s momentum by posting the second consecutive day of losses this month. The U.S. gross domestic product (GDP) declined for two consecutive quarters, fueling recession concerns.
Moreover, the personal consumption expenditures price index, which the Federal Reserve uses as its primary barometer to gauge inflation, rose 6.8% in June, marking the biggest 12-month increase in more than 40 years. This could mean further aggressive interest rate hikes by the central bank after hiking rates four times this year.
A rising interest rate environment is generally beneficial for banks as it helps them expand their net interest margins. However, a potential recession may hurt demand for loans, thus affecting banks’ top line.
Although the industry backdrop is favorable for banks, all banks are not well-positioned to benefit. It could be wise to avoid First Republic Bank (FRC), Signature Bank (SBNY), Webster Financial Corporation (WBS), and SVB Financial Group (SIVB) because of their weak profitability and stretched valuation.
First Republic Bank (FRC)
FRC is a commercial bank and trust company. The bank provides services, including private banking, private business banking, real estate lending, wealth management services, and trust and custody services to clients in selected metropolitan areas in the United States. It operates through two segments: Commercial Banking and Wealth Management.
FRC’s total noninterest expense increased 19.8% year-over-year to $913 million for the second quarter ended June 30, 2022. The company’s cash and cash equivalents declined 20.8% year-over-year to $6.23 billion.
In terms of forward non-GAAP P/E, FRC’s 18.56x is 84.5% higher than the 10.06x industry average. Likewise, its 1.60x forward non-GAAP PEG is 45.4% higher than the 1.10x industry average. And the stock’s 2.10x forward P/B is 78.5% higher than the 1.18x industry average.
FRC’s 0.81% trailing-12-month Return on Total Assets is 32.7% lower than the 1.21% industry average.
Over the past nine months, the stock has declined 26.9% to close the last trading session at $159.08.
FRC’s POWR Ratings reflect its bleak prospects. It has an overall rating of D, equating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It has an F grade for Value and a D for Quality. It is ranked last out of 10 stocks in the F-rated Money Center Banks industry. Click here to see the other ratings of FRC for Growth, Momentum, Stability, and Sentiment.
Signature Bank (SBNY)
SBNY provides commercial banking products and services. It accepts various deposit products, including checking accounts, money market accounts, escrow deposit accounts, cash concentration accounts, certificates of deposits, and other cash management products.
It also offers various lending products such as real estate loans and letters of credit. Moreover, it provides asset management and investment products and wealth management services.
For the fiscal second quarter ended June 30, 2022, SBNY’s total interest expense increased 57.6% year-over-year to $125.47 million. The company’s total deposits declined 1.9% to $104.11 billion, compared to $106.13 billion for the fiscal year ended December 31, 2021. Also, its total assets declined 2% to $115.96 billion, compared to $118.44 billion for the fiscal year ended December 31, 2021.
In terms of forward P/S, SBNY’s 4.07x is 41.9% higher than the 2.87x industry average. Likewise, its 1.46x forward P/B is 24.1% higher than the 1.18x industry average.
SBNY’s 1.03% trailing-12-month Return on Total Assets is 14.8% lower than the 1.21% industry average.
The stock has declined 42.8% year-to-date to close the last trading session at $185.04.
SBNY’s POWR Ratings reflect its weak prospects. It has an overall rating of D, equating to a Sell in our proprietary rating system.
It has a D grade for Quality. Within the Northeast Regional Banks industry, it is ranked #63 out of 65 stocks. To see the other ratings of SBNY for Growth, Value, Momentum, Sentiment, and Stability, click here.
Webster Financial Corporation (WBS)
WBS is a bank and financial holding company. Its subsidiary, Webster Bank, National Association, and its HSA Bank division (HSA Bank), deliver a range of banking, investment, and financial services to individuals, families, and businesses. Its segments include Commercial Banking, HSA Bank, and Retail Banking.
WBS’ nonperforming assets increased 102.6% year-over-year to $250.24 million for the second quarter ended June 30, 2022. The company’s return on average assets came in at 1.10%, compared to 1.12% in the year-ago period. Also, its total deposits declined 2.3% sequentially to $53.07 billion.
In terms of forward GAAP P/E, WBS’ 12.48x is 19.6% higher than the 10.44x industry average. Likewise, its 1.40x forward non-GAAP PEG is 26.7% higher than the 1.10x industry average. And the stock’s 3.30x forward P/S is 15.2% higher than the 2.87x industry average.
WBS’ 24.14% trailing-12-month net income margin is 15.4% lower than the 28.53% industry average. Likewise, its 6.58% trailing-12-month Return on Common Equity is 45.9% lower than the 12.16% industry average. Furthermore, the stock’s 1.14% trailing-12-month Capex/S is 29% lower than the industry average of 1.60%.
Over the past six months, the stock has lost 24.1% to close the last trading session at $45.05.
WBS’ POWR Ratings reflect its weak outlook. It has an overall rating of D, equating to a Sell in our proprietary rating system.
It has a D grade for Quality. It is ranked #64 in the Northeast Regional Banks industry. Click here to see the other ratings of WBS for Growth, Value, Momentum, Stability, and Sentiment.
SVB Financial Group (SIVB)
SIVB is a financial service, bank holding, and financial holding company. Its principal subsidiary, Silicon Valley Bank, offers commercial and private banking products and services. It operates through Global Commercial Bank (GCB), SVB Private Bank, SVB Capital, and SVB Securities.
For the fiscal second quarter ended June 30, 2022, SIVB’s EPS declined 38.4% year-over-year to $5.60. The company’s noninterest expense increased 29.8% year-over-year to $848 million. Also, its noninterest income declined 52.4% year-over-year to $362 million.
In terms of forward non-GAAP P/E, SIVB’s 13.20x is 31.2% higher than the 10.06x industry average. Likewise, its 1.89x forward non-GAAP PEG is 71.2% higher than the 1.10x industry average. And the stock’s 3.55x forward P/S is 23.6% higher than the 2.87x industry average.
SIVB’s 0.78% trailing-12-month Return on Total Assets is 35.4% lower than the 1.21% industry average.
Analysts expect SIVB’s EPS for fiscal 2022 to decline 2.9% year-over-year to $30.32. Over the past nine months, the stock has declined 45.9% to close the last trading session at $400.19.
SIVB’s POWR Ratings reflect its weak prospects. It has an overall rating of D, equating to a Sell in our proprietary rating system.
It has an F grade for Sentiment and a D for Value and Quality. Within the Pacific Regional Banks industry, it is ranked last out of 42 stocks. To see the other ratings of SIVB for Growth, Momentum, and Stability, click here.
FRC shares were unchanged in premarket trading Wednesday. Year-to-date, FRC has declined -22.60%, versus a -13.45% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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