Editors' Pick: Originally published Dec. 29.
Owing to a chronically low interest rate environment that has pressured banking revenue and profits, 2015 was a challenging year for bank stocks. And this was the case for both large money-center banks like Citigroup (C) (down 3.66% so far in 2015) and smaller regional banks like Comerica (CMA) (down 11% in 2015).
Nonetheless, with an average year-to-date gain of 0.25%, according to Fidelity Investments, banks have bested the 0.6% decline in the S&P 500 (SPX) . And the scenario would have been far different, if not for the anticipated Federal Reserve interest rate increase, which took place on Dec. 16. In the one month and three months leading to the rate increase, the KBW Bank Index (BKX) rose by 3% and 7%, respectively. Take away the rate hike and the BKX may not have posted those gains.
And if you've heard recent statements made by Fed Chair, Janet Yellen -- hinting on gradual rate increases throughout 2016 -- banks like Pittsburgh-based PNC Financial (PNC) , a solid performer in 2015 -- up 4.19% -- should continue to do well. PNC is already positioning itself to capitalize on a better interest rate environment. In a filing with the Securities and Exchange Commission, PNC said it expects to generate a 2% increase in net interest income in 12 months if interest rates rise by just 1%. And in the second year of a 1% rate increase, the bank forecasts an additional increase of 6.8%.
Another bank stock to consider in 2016 is San Francisco-based Well Fargo (WFC) (down 1% in 2015), the leading lender in terms of mortgage loans. Wells Fargo may do much better in the quarters and years ahead. This is because interest rates impact the credit market (loans). And in a more favorable interest rate environment, it will be easier for banks -- both large and small -- to generate higher profits since they can realize higher revenue and fees.
So at just 13 times earnings, against a P/E of 21 for the S&P 500 (SPX) index, there is tons on value in WFC stock, which also pays a quarterly dividend of 37.5-cents a share, yielding 2.72% annually. The stock's average analyst 12-month target of $60, implying 10.5% gains from current levels of around $54 a share. And its high target of $65 would yield some 20% gains.
For similar reasons, it's tough to overlook how attractive shares of New-York-based JPMorgan Chase (JPM) have become. JPM stock climbed more than 5% in 2015, outperforming both the Dow Jones Industrial Average (DJI) and the S&P 500. JPM was the top gainer in 2015 among the four "too big to fail" banks, which includes Citigroup, Wells and Bank of America (BAC) . (Bank of America is among the stocks held by Actions Alerts PLUS, a charitable trust managed by TheStreet's Jim Cramer). JPM stock -- at a P/E of 11 -- is the cheapest among its money center peers.
Despite the low-rate environment, not only has the world's third-largest bank by market cap continued to make money, JPMorgan also offers a solid 44-cent quarterly dividend that yields 2.62% annually. For the year ending in December, earnings are projected to climb 12% to $5.95 a share. With its consensus buy rating and the implied 11% gain in its average price target of $73, from its current level of around $66, now's the time to bet on JPMorgan.
The gradual rise in interest rates will also benefit smaller regional banks Atlanta-based SunTrust Bank (STI) (up 1.67% in 2015). Despite the outperformance in 2015, STI stock has an average analyst 12-month price target of $46 -- implying 8% gains from current levels of around $42. It's not a huge premium, but STI stock is priced at only 12 times fiscal 2015 earnings estimates of $3.52 a share -- five point below the S&P 500. Assuming the stock traded on par with the rest of the market, it would be price today at around $60, or 40% higher.
These same value metrics can be applied to regional banks like Cincinnati-based Fifth Third Bancorp (FITB) (down 0.7% in 2015) and North Carolina-based BB&T (BBT) (down 3% in 2015) -- two names to put on your watchlist in 2016.