A lot of uncertainty continues to hang over bank stocks. Analysts and investors remain divided over whether the bank failures that occurred in March and April of this year are behind us, or if there could be more trouble ahead for the sector. Should the U.S. Federal Reserve raise interest rates further, it could spell trouble for some over leveraged lenders and their jittery depositors. This uncertainty has largely kept bank stocks down on the year and put a damper on the potential of any banking sector comeback stocks.
Through nearly six months of 2023, bank stocks have lagged the overall market, with the Dow Jones U.S. Banks Index down 10% year to date. Few, if any, banks have been spared from the current downturn. Even the largest, most well capitalized and stable banks have seen their stocks slump in the last few months as sentiment towards the sector remains tentative. Still, bank stocks are unlikely to stay down forever and a recovery could begin in this year’s second half, spurred by a pause in interest rate hikes and a soft landing for the economy. Here are three banking comeback stocks ready for their big revival.
Bank of America (BAC)
If any U.S. lender is due for a comeback it is Bank of America (NYSE:BAC). The second largest U.S. bank with $3 trillion of assets, Bank of America is a rock solid financial institution. It is also the largest bank holding of the Oracle of Omaha, Warren Buffett, who owns more than one billion shares. However, despite having a fortress balance sheet and plenty of cash on hand, BAC stock is down 13% this year in sympathy with other bank stocks. Over five years, BAC’s share price is now flat.
Bank of America’s valuation looks dirt cheap right now with a price-earnings ratio (P/E) of only 8, and the stock pays a hefty dividend that yields 3.03% each quarter. The stock is sure to come roaring back as concerns about the overall health of the banking sector improve and we move beyond worries of an economic recession. Additionally, Bank of America continues to fortify its consumer banking business and bolster its online banking services, both of which position the lender for a bright future.
On the face of it, Citigroup’s (NYSE:C) stock looks to be holding up better than Bank of America, having gained 6% year-to-date. But look out further and things start to get murky. Over five years, C stock has declined 27%. This makes Citigroup a dubious investment at best. However, there is reason to hope that Citigroup will be among the banking sector comeback stocks. America’s most international bank, Citigroup continues to make moves all over the world.
The bank recently committed to expand its business in China after meeting with regulators in the nation of 1.4 billion people. Citi has submitted an application to establish a securities brokerage in China, and is awaiting approval. The bank has also announced plans to spin-off its Mexico business called “Banamex” in an initial public offering ( ) after it failed to find a buyer for the business unit. Citigroup’s valuation looks even more attractive than Bank of America’s with a P/E of 6. And it pays a quarterly dividend that yields 4.22%.
Goldman Sachs (GS)
A lack of deals has put a crimp in the stock of investment bank Goldman Sachs (NYSE:GS). Managing and underwriting IPOs and mergers and acquisitions has always been the Wall Street firm’s bread-and-butter business. But having endured the second longest bear market since World War II over the past 18 months, deals have been few and far between, and that has hurt GS stock. So far in 2023, Goldman Sachs’ stock is flat as investors wait for a turnaround to materialize.
Goldman Sachs reported a 16% decline in first-quarter trading and advisory revenue, saying deals continue to decline with interest rates elevated. To be sure, sentiment towards Goldman Sachs has also been hurt by the bank’s failed foray into consumer banking, as well as perceptions that the investment bank has lost focus coming out of the pandemic. Management is doing its best to steer the ship through stormy seas, having announced three rounds of staff cuts since September 2022 and jettisoning the consumer bank business.
On the date of publication, Joel Baglole held long positions in BAC and C. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.