Deep Dive: 10 bank stocks that look cheap based on this valuation method — First Republic heads the list

Below is a screen of bank stocks trading below their Dec. 31 tangible book value per share, as calculated by FactSet. This can serve as a starting point for more research if you are interested in considering individual banks for investment following sharp declines in share prices.

From the end of February through the end of last week, the KBW Nasdaq Bank Index
BKX,
-0.30%
fell 28%. But the index rallied on Monday and Tuesday, rising 6%. Shares of First Republic sank 47% Monday before rising 29% on Tuesday. But the stock ended Tuesday down 87% from the end of February.

Volatile times indeed, and maybe some of the large banks may have been overly punished.

One traditional way to measure a bank stock’s valuation is to divide the share price by tangible book value per share. A company’s book value is its common equity divided by the number of shares. Tangible book value nets out intangible assets, such as goodwill and loan servicing rights. The idea is to better represent a bank’s worth in the event of liquidation.

One problem with any valuation measure based on financial reports is that the denominator is as of the most recent fiscal quarter-end, which means Dec. 31 for the banks. Tangible book won’t reflect good or bad developments taking place between the filing of financial reports. But there might be a silver lining for some banks, as the yield on 10-year U.S. Treasury notes
TMUBMUSD10Y,
3.626%
declined to 3.61% on Tuesday from 3.88% at the end of 2022. Since bonds’ market values move in the opposite direction of interest rates, a bank that remains profitable during the first quarter might have a higher tangible book value than it did at the end of the year.

Here’s an example of the problem with quarter-end book values. First Republic Bank is the cheapest stock on the list below, based on its closing price on Tuesday and its tangible book value, calculated by FactSet, as of Dec. 31. But according to Wedbush analyst David Chiaverini, “a distressed M&A sale could result in minimal, if any, residual value to common equity holders owing to FRC’s significant negative tangible book value after taking into account fair value marks on its loans and securities.” That is from the analyst’s note to clients on March 17, after reports of a large outflow of deposits from the bank and after a group of 11 banks, including JPMorgan Chase, deposited $30 billion in First Republic.

Still, a look at price/tangible book ratios might shed light on bargain opportunities for investors.

Starting with the Russell 3000, there were 78 banks or bank holding companies with total assets of at least $20 billion as of Dec. 31. The failures of the main subsidiaries of SVB Financial Group
SIVB,

and Signature Bank Corp.
SBNY,
-22.87%
reduce the list to 76.

Among those 76 banks, here are the 20 trading lowest to tangible book value as of the close on Tuesday — 10 of them traded below tangible book:

Click on the tickers for more about each bank, including news coverage, financials and analysts’ opinions.

Read Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

The list is in ascending order, by price/tangible book as of the close on Tuesday. It also shows the ratios as of the end of February.

Notes about the data:

• New York Community Bancorp
  NYCB,
  +0.22%
  is the only bank on the list whose share price was up for March through Tuesday. This reflected a relief rally after NYCB purchased deposits, branches and loans of the failed Signature Bank from the Federal Deposit Insurance Corp. Here are the details of that deal and more reaction from analysts.

• Western Alliance Bancorp
  WAL,
  +7.70%,
  Goldman Sachs Group Inc.
  GS,
  +0.63%,
  Wells Fargo & Co.
  WFC,
  +0.03%,
  New York Community Bancorp. and Valley National Bancorp
  VLY,
  -0.65%
  were all included in a list on Tuesday of 24 bank stocks favored by analysts.

• Capital One Financial Corp.
  COF,
  -0.07%
  was on a list last week of banks with the best average returns on assets over the past 15 years.

Any stock screen has its limitations. You should do your own research to form your own opinion about any investment before buying.

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