Banks serve as the backbone of the economy, facilitating lending, deposits, and financial services that keep businesses and consumers moving forward. But worries about an economic slowdown and potential credit deterioration have kept sentiment in check, and over the past six months, the banking industry’s 6.5% return has trailed the S&P 500 by 1.8 percentage points.
A cautious approach is imperative when dabbling in banks as many are sensitive to interest rate changes and economic cycles. With that said, here are three bank stocks we would avoid.
Home Bancshares (HOMB)
Market Cap: $6.23 billion
Founded in Conway, Arkansas in 1998 and growing through strategic acquisitions across the Southeast, Home Bancshares (NYSE:HOMB) operates as the bank holding company for Centennial Bank, providing commercial and retail banking services to businesses and individuals across multiple states.
Why Does HOMB Worry Us?
- Net interest income trends were unexciting over the last five years as its 9.6% annual growth was below the typical banking firm
- Estimated net interest income growth of 5.7% for the next 12 months implies demand will slow from its five-year trend
- Annual earnings per share growth of 6.1% underperformed its revenue over the last five years, showing its incremental sales were less profitable
At $31.07 per share, Home Bancshares trades at 1.3x forward P/B. Read our free research report to see why you should think twice about including HOMB in your portfolio.
Enterprise Financial Services (EFSC)
Market Cap: $2.4 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 Wary of EFSC?
- Sales trends were unexciting over the last two years as its 8.4% annual growth was below the typical banking company
- Day-to-day expenses have swelled relative to revenue over the last four years as its efficiency ratio increased by 9.4 percentage points
- Performance over the past two years shows its incremental sales were less profitable, as its 3.6% annual earnings per share growth trailed its revenue gains
Enterprise Financial Services is trading at $66.31 per share, or 1.2x forward P/B. If you’re considering EFSC for your portfolio, see our FREE research report to learn more.
Eastern Bank (EBC)
Market Cap: $5.03 billion
Founded in 1818 as one of America's oldest mutual banks before converting to a public company in 2020, Eastern Bankshares (NASDAQ:EBC) operates as a bank holding company providing commercial and retail banking services primarily in Massachusetts, New Hampshire, and Rhode Island.
Why Is EBC Not Exciting?
- Net interest margin of 3.5% is well below other banks, signaling its loans aren’t very profitable
- Annual tangible book value per share declines of 4.9% for the past five years show its capital management struggled during this cycle
- Below-average return on equity indicates management struggled to find compelling investment opportunities
Eastern Bank’s stock price of $22.96 implies a valuation ratio of 1.2x forward P/B. To fully understand why you should be careful with EBC, check out our full research report (it’s free).
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