3 Bank Stocks That Won’t Put Stress On Your Portfolio

On June 25, the Federal Reserve is scheduled to give their annual report on the balance sheets of our nation’s banks. These “stress tests” are assessments of how prepared banks are for various economic scenarios. And this year, there will be an extra “sensitivity analysis” related to the novel coronavirus.

Although banks are expected to pass the tests easily, there is some concern about what the results may mean for dividends and buybacks. Virtually every publicly traded bank cut its buyback programs at the onset of the Covid-19 pandemic. But there is concern that the Fed may ask banks to cut back on their dividends to shore up their bottom line.

This is concerning to investors because one of the primary reasons to invest in bank stocks is because they pay out a reliable dividend. But while that may be a valid concern, there are a few bank stocks which look to be a solid buy regardless of what the Fed decides.

The first stock I’m looking at is Bank of America NYSE: BAC. Bank of America was a symbol of the excesses that led to the financial crisis in 2008. But the bank has gotten its act, and its balance sheet, in order. And that’s why they look to be a solid buy.

BAC trades at a very healthy 1.2x its tangible book value which at the moment is about $170 billion. To put that in context, it’s about three times higher than it was in the 2008 financial crisis. If you look at the stock by using the current ratio or the debt-equity ratio, the stock also passes with flying colors.

Yet despite being having their financial house in order, the stock is cheap by historical standards. The concern for BAC investors will be the same for all bank stocks. The bank set aside $3.6 billion in the first quarter to cover its forecasted loan losses. However, if the economy does not bounce back as quickly as hoped for, the company may find its reserves to be insufficient to cover loan defaults.

One bank that is considered to be among the best in terms of quality is JPMorgan NYSE: JPM. One of the reasons for the company’s success is the leadership of Jamie Dimon, the only one of the big bank executives to still be in their position after the financial crisis.

Like Bank of America, JPMorgan is well capitalized with a tangible book value of $180 billion. And its ratios look great. The bank has a proven history of delivering innovation that drives profits. As proof of that, over the past five years, JPMorgan has delivered 7% of compounded annual growth in revenue and 11% of compounded annual growth in earnings.

JPMorgan shares got a boost on June 25 as the Federal Reserve announced it would loosen its restrictions on the Volcker rule that will allow a bank like JPM to make large investments into venture capital and similar funds.

The bank has a dividend yield of 3.68% and will pay out the next dividend payment on July 31, 2020.

The last of the three stocks for you to consider is U.S. Bancorp NYSE: USB. At 4.35%, the company has one of the more attractive dividend yields among the big banks. And based on cash flow, U.S. Bancorp only pays out 34% of its cash flow as a dividend. The company will enter its ex-dividend period on June 29 which means that current shareholders can count on a nice dividend in July.

The Swiss bank made news recently by suggesting that as much as one-third of its staff may work from home permanently even after the Covid-19 pandemic eases. The company is currently looking into ways for employees to return to their offices in a staggered approach.

This is not the great recession

It took several years, but bank stocks have largely regained the investors’ trust. And although economic downturns always make investors nervous about bank stocks, this is one time when banks can honestly say they’re not the problem.

In fact, due to customers depositing their stimulus checks, many banks are well-capitalized. This is not 2008 where the Federal Reserve was pumping liquidity into the banks.  

Yes, lower interest rates through 2021 (at least) is not an ideal condition for the banks. And the possibility of a recession may put stress on revenue and profits. But unlike in 2008, banks went into the pandemic from a position of strength.

And with that in mind, you should not hesitate to invest in these three bank stocks that look to be well-capitalized despite the pandemic.