Banks serve as the backbone of the economy, facilitating lending, deposits, and financial services that keep businesses and consumers moving forward. Market leaders have certainly capitalized on rising interest rates and strong loan demand to boost profitability, helping fuel a 8.5% gain for the banking industry over the past six months. This performance has closely followed the S&P 500.
Although banks have produced good results, only a handful will thrive over the long term as fintech disruptors are rapidly taking market share from traditional institutions. On that note, here are three bank stocks we’re steering clear of.
WSFS Financial (WSFS)
Market Cap: $3.87 billion
Founded in 1832 as Wilmington Savings Fund Society and one of the oldest banks in America still operating under its original name, WSFS Financial (NASDAQ: WSFS) operates a community banking and wealth management franchise primarily serving customers in the Mid-Atlantic region through its main subsidiary, WSFS Bank.
Why Do We Think Twice About WSFS?
- 9.7% annual net interest income growth over the last five years was slower than its banking peers
- Estimated net interest income growth of 3.3% for the next 12 months implies demand will slow from its five-year trend
- Estimated tangible book value per share growth of 9.3% for the next 12 months implies profitability will slow from its two-year trend
WSFS Financial is trading at $75.98 per share, or 1.4x forward P/B. Dive into our free research report to see why there are better opportunities than WSFS.
Simmons First National (SFNC)
Market Cap: $3.22 billion
With roots dating back to 1903 and a presence across Arkansas, Kansas, Missouri, Oklahoma, Tennessee, and Texas, Simmons First National (NASDAQ: SFNC) is a regional bank holding company that provides banking and financial services to individuals and businesses.
Why Do We Think SFNC Will Underperform?
- Muted 4% annual net interest income growth over the last five years shows its demand lagged behind its banking peers
- Efficiency ratio is expected to worsen by 17.8 percentage points over the next year
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 4% annually while its revenue grew
Simmons First National’s stock price of $22.48 implies a valuation ratio of 0.9x forward P/B. If you’re considering SFNC for your portfolio, see our FREE research report to learn more.
Preferred Bank (PFBC)
Market Cap: $1.20 billion
Founded in 1991 with a focus on serving the Pacific Rim community in Southern California, Preferred Bank (NASDAQ: PFBC) is a commercial bank that provides banking products and services to small and mid-sized businesses, entrepreneurs, real estate developers, and high net worth individuals.
Why Is PFBC Not Exciting?
- Muted 9% annual net interest income growth over the last five years shows its demand lagged behind its banking peers
- Net interest margin shrank by 61.7 basis points (100 basis points = 1 percentage point) over the last two years, suggesting the profitability of its loan book is decreasing or the market is becoming more competitive
- Earnings per share lagged its peers over the last two years as they only grew by 1.3% annually
At $101.76 per share, Preferred Bank trades at 1.4x forward P/B. Read our free research report to see why you should think twice about including PFBC in your portfolio.
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