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 11% over the past six months. This return lagged the S&P 500’s 13.3% 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. Taking that into account, here are three bank stocks we’re steering clear of.
Butterfield Bank (NTB)
Market Cap: $2.16 billion
Founded in 1784 as one of the oldest banks in the Western Hemisphere, Butterfield Bank (NYSE: NTB) provides banking, wealth management, and trust services to individuals and businesses in select offshore financial centers including Bermuda, Cayman Islands, and the Channel Islands.
Why Are We Cautious About NTB?
- Annual net interest income growth of 3.8% over the last five years was below our standards for the banking sector
- Estimated net interest income growth of 1.1% for the next 12 months implies demand will slow from its five-year trend
- Inferior net interest margin of 2.7% means it must compensate for lower profitability through increased loan originations
At $54.68 per share, Butterfield Bank trades at 1.8x forward P/B. Dive into our free research report to see why there are better opportunities than NTB.
Enterprise Financial Services (EFSC)
Market Cap: $2.13 billion
Starting as a single bank in Missouri in 1988 and expanding through strategic growth, Enterprise Financial Services (NASDAQ: EFSC) is a financial holding company that offers banking, lending, and wealth management services to businesses and individuals across seven states.
Why Are We Hesitant About EFSC?
- 7.7% annual revenue growth over the last two years was slower than its banking peers
- Day-to-day expenses have swelled relative to revenue over the last four years as its efficiency ratio increased by 8.7 percentage points
- Incremental sales over the last two years were less profitable as its 5.2% annual earnings per share growth lagged its revenue gains
Enterprise Financial Services’s stock price of $58.31 implies a valuation ratio of 1x forward P/B. If you’re considering EFSC for your portfolio, see our FREE research report to learn more.
PennyMac Financial Services (PFSI)
Market Cap: $4.45 billion
Founded during the 2008 financial crisis to help address the mortgage market meltdown, PennyMac Financial Services (NYSE: PFSI) is a specialty financial services company that originates, services, and manages investments related to residential mortgage loans in the United States.
Why Does PFSI Worry Us?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 12.1% annually over the last five years
- 4% annual net interest income growth over the last five years was slower than its banking peers
- Performance over the past five years shows each sale was less profitable as its earnings per share dropped by 13.1% annually, worse than its revenue
PennyMac Financial Services is trading at $85.73 per share, or 1x forward P/B. To fully understand why you should be careful with PFSI, check out our full research report (it’s free).
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