It's no secret that the banking sector has come under pressure. Three banks in the U.S. collapsed in March, and the large Swiss bank Credit Suisse got forced into an acquisition by regulators on concerns that the bank might not survive.
One of the big problems is that deposits are funneling out of the banking system. Part of the reason has to do with the realization that banks have lots of uninsured deposits. Another reason is that depositors have woken up to the fact that they can get 4% to 5% by investing in safe short-term U.S. Treasury bills or by putting their money into a certificate of deposit. The U.S. banking system lost more than $125 billion of deposits for the week ending March 22.
These deposit outflows could be quite painful to bank earnings because banks have to replace them with higher-cost funding sources or take other actions that will hurt their profitability. However, all hope is not lost. Here are five banks that can better weather the challenging deposit environment right now.
1. BancFirst
Oklahoma-based BancFirst (NASDAQ: BANF) only has about $12.4 billion in assets, but the bank is very well positioned to handle the current environment. BancFirst didn't invest too heavily into securities when interest rates were low and is currently holding more than 23% of its total assets in cash, which allows the bank to cover any potential deposit outflows in a way that's less impactful to earnings.
Furthermore, most of BancFirst's securities are designated as available-for-sale (AFS), meaning their values are marked to market each quarter and reflected in equity. The current unrealized losses in this portfolio are quite manageable.
BancFirst will also hopefully be more insulated than most when it comes to deposit outflows because it banks 178,000 retail households in Oklahoma, which is more than any other bank in the state. Roughly 54% of the bank's deposits were insured by the Federal Deposit Insurance Corp. (FDIC) at the end of 2022. Add in the 23% of cash, and the bank is covered for a large majority of total deposits.
BancFirst has also generated great returns over the years. The stock is only down about 7% this year and currently trades at 256% to its tangible book value, or net worth, which is a high valuation. But in the current environment, it makes sense to pay up for well-run banks.
2. Cullen/Frost Bankers
The Texas-based $52 billion asset Cullen/Frost Bankers(NYSE: CFR) also smartly hoarded cash over the last few years, with 22.6% of its total assets in cash at the end of 2022. The bank is also not sitting on any unrealized held-to-maturity (HTM) losses, with most of its securities purchases designated as AFS.
Now, the bank only has about 30% of its deposits insured by the FDIC, but this certainly becomes less of an issue when you consider its high cash levels. Its securities book is not in bad shape, either. More than $500 million of the bank's AFS securities mature within less than one year, while $4.9 billion mature between the next one and five years. Furthermore, in the bank's HTM portfolio, the $1.96 billion of securities that don't mature for at least 10 years have a weighted average yield of roughly 4.7%.
Cullen/Frost is another bank with an expensive valuation, but the stock is down 20% this year and now has an annual dividend yield of more than 3%, so this does look like a good buying opportunity.
3. JPMorgan Chase
As it has in past banking crises, JPMorgan Chase(NYSE: JPM), the largest bank by assets in the U.S., has navigated the challenging environment well. JPMorgan's CEO Jamie Dimon was very clear early on in the pandemic in saying that he didn't want to go into securities too early on because of how little they were yielding.
Instead, Dimon hoarded cash and still held a cash position of 15.5% at the end of 2022. While the bank does have some unrealized bond losses, the vast nature of its deposit base neutralizes this threat. If anything, the large "too big to fail" banks will benefit from this recent crisis.
The stock is only down about 3.5% this year, but I view JPMorgan Chase as a best-in-breed bank stock and therefore always a good one to buy.
4. Citigroup
Another "too big to fail" bank, Citigroup(NYSE: C), also ended 2022 in a very strong cash position at roughly 14% of total assets. This is up significantly from 2021, as Citigroup had to reposition its balance sheet to prepare for higher regulatory capital requirements.
The bank is in the midst of a big transformation as it winds down most of its international consumer banking operations and attempts to improve returns after many years of underperformance. Citigroup will likely benefit from all the turmoil because middle-market companies are likely to view the bank as attractive, given that it can't fail and its strong corporate treasury products. Additionally, Credit Suisse's recent woes should open up international opportunities as well.
Citigroup trades at just 57% of its tangible book value and is also paying an annual dividend yield of 4.36%. I think this presents an attractive value opportunity.
5. M&T Bank
At the end of 2022, Buffalo-based M&T Bank(NYSE: MTB), which now has total assets of over $200 billion, held a cash position of about 12.5% and had very manageable unrealized bond losses.
This is another bank that has been a very strong performer over a long period of time. The bank does have a decent amount of exposure to commercial real estate, which the market is concerned about, but it has a history of conservative underwriting. Trading at just 135% to TBV, the valuation is now at lows not seen since the early part of the pandemic in 2020 and Great Recession, and M&T has an annual dividend yield in excess of 4%.
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Citigroup is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Bram Berkowitz has positions in Citigroup and has the following options: long January 2024 $80 calls on Citigroup. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.
