Banks play a critical role in the financial system, providing everything from commercial loans to wealth management and payment processing services. But concerns about loan losses and tightening regulations have tempered enthusiasm, limiting the banking industry’s gains to 8% over the past six months. This return lagged the S&P 500’s 13% climb.
While some banks have strong balance sheets and diversified revenue streams that enable them to thrive in any environment, the odds aren’t great for the ones we’re analyzing today. Keeping that in mind, here are three bank stocks that may face trouble.
Prosperity Bancshares (PB)
Market Cap: $8.95 billion
With a network of banking centers spanning the Lone Star State and beyond, Prosperity Bancshares (NYSE:PB) operates full-service banking locations throughout Texas and Oklahoma, offering a wide range of financial products and services to businesses and consumers.
Why Is PB Risky?
- Net interest income trends were unexciting over the last five years as its 3.4% annual growth was below the typical banking firm
- Annual earnings per share growth of 1% underperformed its revenue over the last five years, showing its incremental sales were less profitable
- Capital strength will likely plateau over the next 12 months as Wall Street expects flat tangible book value per share
At $74.49 per share, Prosperity Bancshares trades at 0.9x forward P/B. To fully understand why you should be careful with PB, check out our full research report (it’s free).
Walker & Dunlop (WD)
Market Cap: $1.45 billion
Originating as a small mortgage banking firm during the Great Depression in 1937, Walker & Dunlop (NYSE:WD) provides commercial real estate financing, property sales, appraisal, and investment management services with a focus on multifamily properties.
Why Are We Out on WD?
- Annual net interest income declines of 41.6% for the past five years show its loan book struggled during this cycle
- Earnings per share fell by 13.7% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- Tangible book value per share tumbled by 8.5% annually over the last five years, showing banking sector trends are working against it during this cycle
Walker & Dunlop is trading at $42.83 per share, or 0.8x forward P/B. If you’re considering WD for your portfolio, see our FREE research report to learn more.
Ellington Financial (EFC)
Market Cap: $1.76 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 Should You Sell EFC?
- Performance over the past five years shows its incremental sales were less profitable, as its 4.6% annual earnings per share growth trailed its revenue gains
- Products and services are facing significant credit quality challenges during this cycle as tangible book value per share has declined by 5.9% annually over the last five years
- ROE of 6.7% reflects management’s challenges in identifying attractive investment opportunities
At $13.64 per share, Ellington Financial trades at 1x forward P/B. Dive into our free research report to see why there are better opportunities than EFC.
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