Banks use their capital and expertise to help businesses grow while offering consumers essential financial products like mortgages and credit cards. These institutions have benefited from improved net interest margins and robust credit growth, so it’s no surprise the banking industry has posted a 20.2% gain over the past six months, beating the S&P 500 by 11.6 percentage points.
Regardless of these results, investors must exercise caution as many banks are sensitive to interest rate fluctuations and economic cycles. On that note, here are three bank stocks we’re swiping left on.
Citizens Financial Group (CFG)
Market Cap: $29.06 billion
Tracing its roots back to 1828 as a community-focused institution, Citizens Financial Group (NYSE:CFG) is a regional bank that provides retail and commercial banking services to individuals, small businesses, and large corporations across 14 states.
Why Is CFG Risky?
- Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last two years
- Annual net interest income growth of 5% over the last five years was below our standards for the banking sector
- Flat earnings per share over the last two years lagged its peers
Citizens Financial Group is trading at $68.25 per share, or 1.1x forward P/B. Read our free research report to see why you should think twice about including CFG in your portfolio.
BancFirst (BANF)
Market Cap: $4.04 billion
Operating as a "super community bank" with a decentralized management approach that emphasizes local responsiveness, BancFirst Corporation (NASDAQ:BANF) operates as a financial holding company providing commercial banking services to retail customers and small to medium-sized businesses primarily in Oklahoma and Texas.
Why Does BANF Give Us Pause?
- Net interest income trends were unexciting over the last five years as its 9.8% annual growth was below the typical banking firm
- Estimated net interest income growth of 4.6% for the next 12 months implies demand will slow from its five-year trend
- Earnings per share lagged its peers over the last two years as they only grew by 6% annually
BancFirst’s stock price of $120.38 implies a valuation ratio of 2x forward P/B. If you’re considering BANF for your portfolio, see our FREE research report to learn more.
Ellington Financial (EFC)
Market Cap: $1.60 billion
Operating under the guidance of Ellington Management Group, a respected name in structured credit markets, Ellington Financial (NYSE:EFC) acquires and manages a diverse portfolio of mortgage-related, consumer-related, and other financial assets to generate returns for investors.
Why Do We Steer Clear of EFC?
- Incremental sales over the last five years were less profitable as its 1.6% annual earnings per share growth lagged its revenue gains
- Tangible book value per share tumbled by 4% annually over the last five years, showing banking sector trends are working against its favor during this cycle
- Below-average return on equity indicates management struggled to find compelling investment opportunities
At $12.92 per share, Ellington Financial trades at 1x forward P/B. Check out our free in-depth research report to learn more about why EFC doesn’t pass our bar.
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