It has been a difficult year for the banking industry as it dealt with a crisis earlier this year that resulted in three major banks going under. While the crisis hit smaller, regional banks the hardest due to deposit outflows, the entire industry felt the pain.
Of course, many larger banks navigated the crisis fairly well, and some even benefited from a flight to safety. However, because of the negative investor sentiment toward all banks, valuations plummeted. As a result, a lot of good banks are now trading at dirt-cheap valuations.
Here are two cheap bank stocks that shouldn’t be overlooked – Bank of America (NYSE:BAC) and Bank of New York Mellon (NYSE:BK).
One of Buffett’s favorites
The one thing these two stocks have in common, aside from being large banks, is that they have both been favorites of Warren Buffett, the chairman and CEO of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B).
Bank of America, the second-largest bank in the U.S., is Buffettʻs second-largest holding behind only Apple (NASDAQ:AAPL). On the other hand, BNY Mellon had been in Buffettʻs Berkshire Hathaway portfolio for 13 years before he dumped it in the first quarter of this year during the banking crisis. However, there remains a lot of upside for both of these stocks.
Bank of America is coming off a solid third quarter in which its revenue climbed 3% year over year to $25.2 billion and its net income jumped 10% year over year to $7.1 billion or 81 cents per share. One of the things that sets Bank of America apart from most of its large bank competitors is its multiple, robust revenue streams.
The bank’s net income from consumer banking dropped 7% due to higher provisions for credit losses, while its global wealth and asset management earnings fell 13% due to lower net interest income. However, Bank of America did see earnings gains in investment banking (+11%) and global markets/trading (+10%).
BNY Mellon also had a good third quarter, with its revenue up 2% year over year to $4.4 billion and its adjusted net income climbing 1% to $992 million. Further, the bank’s assets under management increased 3%, while its assets under custody rose 8% to $45.7 trillion.
As a custody bank, BNY Mellon is different than Bank of America. It holds assets not only for institutional investors like banks, pension funds, asset managers and mutual fund companies but also for high-net-worth individuals. It also offers asset servicing, fund accounting, clearing, settlement and other functions. Most of its revenue comes from fees for asset servicing and investment management.
Analysts rate BNY Mellon as a buy with a consensus price target of $52 per share, which is some 25% higher than its current price. Additionally, BNY Mellon is an excellent dividend stock that has increased its payout for 12 straight years and has a current yield of 3.98%.
Dirt-cheap valuations
Banks in general are cyclical, and they tend to perform well in a good economy, when individuals and businesses are borrowing and spending more, interest rates are lower, and asset valuations are higher. While the economy seems to be slowly improving and rates may have plateaued, there remains some uncertainty. However, things seem to be moving in the right direction, and thatʻs good for banks.
What makes these stocks worth a look right now is their valuations, which are dirt cheap. Both are trading below their book value, which means their stock price is trading below the value of the assets on the books. Their five-year price-to-earnings/growth ratios are also below one, which indicates a stock that is undervalued in relation to its future earnings potential.
Of the two, Bank of America is the better value with more long-term growth potential as one of the biggest and best banks in the country. However, BNY Mellon is also worth a look for income investors.
Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.
