3 Large Banks Presenting Value Opportunities After Sector Selloff

Key Points

• The financials sector has been the worst performer in the past three months, following regional bank failures and scares.
• One analyst says the direct impact of regional banking turmoil on the S&P 500 is expected to be minimal, as regional banks constitute only a small portion of the index.
• Consolidation in the banking sector is seen as a tailwind for large-cap equity returns, as larger banks are more insulated from the risks faced by regional banks.
• Bank of America, Wells Fargo, and U.S. Bancorp all have low P/E and P/B ratios, indicating they may be trading at low multiples relative to their intrinsic value. 

The financials sector is the worst performer in the past three months, which should come as no surprise following multiple regional bank failures and scares. 

But large-cap financials Bank of America Corp. NYSE: BAC, Wells Fargo & Co. NYSE: WFC and U.S. Bancorp NYSE: USB all got caught in the downdraft, and all appear to be value candidates at this point. 

The Financial Select Sector SPDR ETF NYSEARCA: XLF is comprised of large-cap stocks, but its three-month decline of 10.41% shows that banking industry fear spread to bigger banks, even though these companies’ operations remained sound.

In the past month, the large-cap sector has improved, with energy now having the dubious distinction of being the laggard. The XLF ETF has posted a five-day gain of 2.19%. 

Regional Bank Stocks Still In Meltdown

Meanwhile, the SPDR S&P Regional Banking ETF NYSEARCA: KRE chart shows what amounts to a meltdown, with a three-month decline of 37.44%. Its most heavily-weighted holdings include some regional banks whose stocks have been decimated. 

But does this mean the broader financial sector is a no-fly zone for investors at this point? 

In a May 5 research report from asset manager Raymond James, “Perspectives On Regional Banking Turmoil,” chief investment officer Larry Adam wrote, “The direct impact of the regional banking turmoil should be minimal on the S&P 500 Index as the regional banking sub-industry is only ~0.30% of the Index as of May 3, 2023.” 

As regional banks declined in price, he added,  “They’ve become a smaller portion of the large-cap broad market indices and will contribute little to those returns going forward. Consolidation in the banking sector is now a tailwind for large-cap equity returns as larger banks are much more insulated to the near-term risks these regional banks face.”

Given that backdrop, here’s a look at the current valuations and prospects for three big banks.

Bank of America

If you feel like you see Bank of America branches everywhere you go, you’re not imagining it. 

The company operates 3,900 retail financial centers in 38 states. It’s the second-largest U.S. bank, ranked by assets, and currently has a low valuation. Its price-to-earnings ratio is 8, which is 40% below the S&P 500 average, and near its lowest level since 2012. 

The price-to-book ratio is 0.82. That’s an important metric to watch. When the P/B ratio is low, it suggests that the market price is relatively low compared to the company's book value, indicating that the stock may be undervalued. This could present an opportunity for investors to potentially purchase the stock at a lower price relative to its intrinsic value.

Warren Buffett’s Berkshire Hathaway NYSE: BRK.B added to its stake in Bank of America in the most recent quarter. 

Wells Fargo

Wells Fargo is another of those seemingly ubiquitous banks, with locations in 37 states. It’s one of the biggest U.S. banks according to deposits., behind only JPMorgan Chase & Co. NYSE: JPM and Bank of America. 

MarketBeat’s Wells Fargo & Company earnings data show the company beat top and bottom-line views in the most recent quarter. Revenue growth accelerated in the past three quarters. 

This is a company that’s had some work to do, trying to restore trust after some corporate scandals. The most notable involved the creation of millions of unauthorized customer accounts by bank employees to meet aggressive sales targets. The bank has faced significant regulatory fines, leadership changes, and damage to its reputation as a result.

Like Bank of America, Wells Fargo has low P/E and P/B ratios, meaning it’s likely trading at low multiples, relative to its intrinsic value.

U.S. Bancorp

U.S. Bancorp is generally considered a regional bank, despite being one of the largest banks in the U.S. by assets. That categorization has something to do with its larger three-month decline than either Bank of America or Wells Fargo. 

U.S. Bancorp operates primarily in the Midwest and Western regions of the country. 

The stock has suffered some price damage recently, as Berkshire Hathaway eliminated its holding. 

However, this has some strengths you don’t find in all big companies, such as a three-year earnings growth rate of 11%.

When it comes to value metrics, the P/E ratio of 7, is its lowest level since 2012, except for a brief dip at the beginning of the pandemic in 2020. Its P/B ratio is low, at 0.91. U.S. Bancorp analyst ratings show a price target of $50.35, an upside of 62.89%, another indication this stock may have been oversold.