Banks serve as the backbone of the economy, facilitating lending, deposits, and financial services that keep businesses and consumers moving forward. Furthermore, economic conditions have supported loan growth and fee income, a trend that has enabled the banking industry to return 10.3% over the past six months. At the same time, the S&P 500 was up 7.3%.
Nevertheless, investors should tread carefully as many banks are cyclical due to their exposure to credit risk and regulatory changes. On that note, here are three bank stocks that may face trouble.
Simmons First National (SFNC)
Market Cap: $3.08 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 Pass on SFNC?
- Muted 2.4% 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 percentage points over the next year
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 6.7% annually while its revenue grew
Simmons First National’s stock price of $21.27 implies a valuation ratio of 0.9x forward P/B. To fully understand why you should be careful with SFNC, check out our full research report (it’s free).
Pinnacle Financial Partners (PNFP)
Market Cap: $14.32 billion
Founded in 2000 with a focus on delivering big-bank capabilities with community bank personalization, Pinnacle Financial Partners (NASDAQ:PNFP) is a Tennessee-based financial holding company that provides banking, investment, trust, mortgage, and insurance services to businesses and individuals.
Why Are We Wary of PNFP?
- Inferior net interest margin of 3.2% means it must compensate for lower profitability through increased loan originations
- Expenses have increased as a percentage of revenue over the last four years as its efficiency ratio degraded by 7 percentage points
- Estimated tangible book value per share growth of 2.8% for the next 12 months implies profitability will slow from its two-year trend
At $95.95 per share, Pinnacle Financial Partners trades at 1x forward P/B. If you’re considering PNFP for your portfolio, see our FREE research report to learn more.
TFS Financial (TFSL)
Market Cap: $4.14 billion
Tracing its roots back to 1938 during the Great Depression era when savings and loans were vital to homeownership, TFS Financial (NASDAQ:TFSL) is a savings and loan holding company that provides mortgage lending, deposit services, and other retail banking products primarily in Ohio and Florida.
Why Should You Sell TFSL?
- Annual net interest income growth of 3.9% over the last five years was below our standards for the banking sector
- Inferior net interest margin of 1.7% means it must compensate for lower profitability through increased loan originations
- Earnings per share lagged its peers over the last five years as they only grew by 2% annually
TFS Financial is trading at $14.84 per share, or 2.2x forward P/B. Read our free research report to see why you should think twice about including TFSL in your portfolio.
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