Today I’ll look at the cheapest bank stocks in the market.

“Cheapest” has a different meaning in the world of bank stocks. We normally measure the value of stocks based on earnings and growth rates. That’s somewhat true of bank stocks, but we look at several different metrics unique to banks as well.

That’s because bank earnings fluctuate a lot from quarter to quarter and year to year. So much depends on how consumers are using money and credit, and how the banks other divisions perform.

Bank stocks were destroyed in the mortgage crisis thanks to so many of them having toxic loans on their books. Almost all of them are well beyond that phase, now, and back on track.

Bank stocks offer modest growth and modest income, via dividend payments. They tend to have lower volatility.

The cheapest bank stocks can be found across many different subdivisions – from large multinational corporations to local savings and loans. Even better, the banking sector is in a bear market, creating lots of opportunity.

The Cheapest Bank Stocks

If you’re in a hurry, below are our picks for the most lowest priced bank stocks as of this writing.

1. Bank of America: Likely has the most long-term upside.
2. J.P. Morgan Chase: A diversified player with excellent growth.
3. Synchrony Financial: A solid and profitable lender with a strong book.

Keep reading to learn more about these inexpensive bank stocks and my thoughts on them.

What Are Bank Stocks?

We all know what banks are, and right now banks are not in favor in the stock market. Bank stocks represent companies that provide a large variety of financial services. We tend to think of banks mostly as places to store our money, and where to get large loans.

But with the advancement of technology, banks now offer a huge range of other services that meet the needs of millions of Americans in ways they didn’t use to. This includes things like cash management, investment banking, advisory services, wealth management, capital-raising, risk management, brokerages, research, security, fiduciary duties, trustee services insurance, asset management, treasury services, liquidity solutions, payment processing, and so much more.

How Do You Determine What Qualifies As The Cheapest Bank Stocks?

The cheapest bank stocks have two of these three characteristics:

1. Solid Net Interest Income Growth
2. Competitive EV-To-Revenue ratio
3. Diversification

Solid Net Interest Income Growth

If a bank is really a solid bank, it will not only charge interest on its loans, but competitive interest rates that result in growth over time. We want a bank to make more and more performing loans, so it generates more and more interest income on those loans.

Notice that I say “performing loans”. Net interest income will grow if the loans a bank writes perform. NII may grow very quickly at a fast rate if a lot of bad loans are written. They’ll perform for a little while and earn more interest, but then principal will be lost upon default.

Competitive EV-to-Revenue ratio

I don’t really like to use P/E ratio for bank stocks because net income fluctuates a great deal with bank stocks. Growth is also difficult to peg on an ongoing basis. So this ratio is a bit more apples-to-apples. The cheapest bank stocks have a low ratio.

EV is short for “enterprise value”, and it is calculated by taking market capitalization + preferred shares + minority interest + debt – total cash.

Diversification

Diversification is essential in banking today. While some banks are experts in lending, and have built fantastic businesses on writing solid performing loans with few defaults, a bank’s best chances of success are to diversify into all those different services I mentioned above.

That way, if the economy is such that loans dry up, the bank isn’t entirely dependent on that revenue source. If people suddenly move away from wealth management, as happened with Wells Fargo, it has many other sources to generate revenue.

Here’s a video with Warren Buffett, who talks about several sectors, including banking.

Bank of America

What is it?

Bank of America is a 4500-branch name brand bank all across America that has the diversification I mentioned.

The bank serves consumers, businesses, institutional investors, and governments all over the world through four divisions, and this will give you an idea of the level of diversification I look for:

The Consumer Banking segment offers your traditional checking and savings accounts, CDs and IRAs, investment accounts, credit and debit cards, mortgages, home equity loans, and all kind of personal loans.

The GWIM division handles investment banking, brokerage, wealth management, and trust services.

The Global Banking division offers commercial loans, leases, credit lines, trade finance, asset-based lending, foreign exchange, debt and equity underwriting, and merger services.

The Global Markets segment offers market-making, financing, securities clearing, settlement, and custody services, and mortgage products.

What makes it a cheap stock?

Bank of America is finally firing on all cylinders after a tough recovery period. It’s been routinely generating well over $6 billion in quarterly net income on revenue increases of around 4%.

Let’s remember this was one of the worst players in the toxic mortgage world, and had to write off tens of billions of dollars. This is quite the comeback.

Net interest income, a metric we focus on, has been growing between 4% and 5%, and also enjoying about a 3% increase in non-interest income.

Loans, deposits, and assets are the source for growing income, so we want to see these growing, and they have been – at an average run-rate of about 5%, 3%, and 15%, respectively.

I also mentioned that loans need to be performing, and they are. We find this number listed as charge-offs, and that number has been stable, with very little fluctuation over the past year, averaging about $900 million per quarter.

BAC stock is also in good shape because, as interest rates rise, it makes more money on its loans.

Finally, BAC enjoys a competitive EV-to-Revenue ratio of 2.31. Wells Fargo, which I consider to be in a lot of trouble, is at 2.7. All these factors make Bank of America one of the cheapest bank stocks.

Read Also: What’re the best dividend stocks?

J.P. Morgan Chase

What is it?

J.P. Morgan is very similar to Bank of America, but it has a longer history of being in the investment banking side, and dealing with global markets.

The company was originally two separate firms. J.P. Morgan was pretty much a legacy investment bank with global recognition and reputation to go along with it. It merged with Chase, a money-center bank, a number of years ago to form this powerhouse.

What makes it a cheap stock?

JPMorgan Chase is a phenomenally successful diversified operation, and has generated almost $28 billion in net income over the past twelve months, and that will be about a 20% jump over the previous period. That will come on the back of some $102 billion in revenue.

The company is increasing performance in virtually every metric. In 2015, JPMorgan Chase generated $44.6 billion in net interest income. That’s an astonishing number by any measure, but then leap to $51.4 billion in 2017. This year is likely to end up between $54 billion and $55 billion.

This 7% increase in net interest income is joined by a lot of gravy: another 7% increase in noninterest income.

With the economy booming, and Americans addicted to debt to begin with, JP Morgan Chase has also been enjoying robust growth in its credit card revenue. The company excels at marketing, and Chase cards are generally considered to have the bestrewards programs.

JP Morgan also holds the top spot as credit card issuer, co-branded credit card issuer, and with credit and debit payments volume.

The stock market has also seen a lot of volatility in 2018, and that is good news for the company’s trading division. While volatility makes investors queasy, it also makes them react, which means they trade more, and the bank thus makes more commissions.

Meanwhile, JP Morgan Chase has been leading the sector with 9% deposit growth over the past three years.

I think it’s difficult to find a more solid investment. Add in the 3.19% dividend and you have a real winner and one of the least expensive bank stocks.

Synchrony Financial

What is it?

Synchrony Financial is one of those banks I mentioned that has a big lending business, and skews more toward personal financial products than the other businesses. It is very big in the credit card business, but has other creative approaches to credit.

It offers financing for installment loans, health and personal care procedures, and has a network of credit products that tie into national and regional retailers, local merchants, manufacturers, buying groups, industry associations, and healthcare providers.

In this way, it’s kind of an odd duck and that’s one thing I like about it.

What makes it a cheap stock?

Synchrony is growing at a faster rate than the other banks. It has a loan portfolio that is approaching $100 billion, growing at more than 13% annually.

Meanwhile, the banking side soaked up another $8 billion in new deposits. A key element to Synchrony’s success is that its credit cards are tied into those local merchants and national stores. These tend to carry higher interest rates than most credit cards, so its net interest income is growing at a rate exceeding 10%.

While its EV-to-Revenue ratio is high at 3.87, the stock itself is almost 50% off its 52-week high, despite earning almost $2.3 billion in the past year, which is in the same range its always had. That makes it a very enticing selection for the category of cheapest bank stocks.