The last few months have witnessed a remarkable recovery in the prices of banking stocks, following the dual routs they suffered in 2023, brought on by the Spring Banking Crisis and the Autumn Treasury Yield Panic. In March and April of last year, several U.S. banks failed when depositors withdrew all their money, and the bankers were caught with not enough cash and liquid securities to pay them off. Then in the third quarter, treasury yields rose (i.e., the prices of treasuries fell), leading to concerns that more banks would be left without sufficient liquid securities to handle scenarios like those that sank SVB and First Republic.
Fortunately, inflation declined in the fourth quarter, and the Federal Reserve chair signalled the possibility of lower interest rates in 2024. This led to a rally in treasury prices and, with it, an improvement in banks’ liquidity metrics. For example, the unrealized losses on Bank of America’s treasury portfolio declined by $33 billion.
So, we have a macroeconomic environment that is becoming increasingly friendly to banks. Interest rates are high enough to produce high interest revenue, yet not going so high that another liquidity crisis is likely to emerge. If the yield curve un-inverts, then we could see an increase in margins and overall earnings, which takes bank stocks higher than they are now. Some small ones could even go parabolic! In this article, I will explore three bank stocks that could go parabolic in 2024.
EQB
EQB (TSX: EQB) is a Canadian bank stock that has already gone parabolic, with its shares up 738% since January 2010. The total return in the 2010-2014 period is likely above 1,000% if you include dividends. Generally speaking, huge runs like this one don’t last forever, size being, after all, the anchor of performance. However, with a $3.4 billion market cap, EQB remains a small-cap stock. It could easily rise another few hundred percent, especially if economic conditions remain favourable to it.
Why is EQB stock rising so much? Put simply, because the underlying company is growing and profitable. In its most recent quarter, EQB put out the following stellar numbers:
- $375 million in revenue, up 80%.
- $141 million in net income, up 208%.
- $3.64 in diluted earnings per share (EPS), up 208%.
- $9.08 in full-year EPS, resulting in a price-to-earnings ratio below 10.
Extremely strong growth. And if the economy goes in EQB’s favour in 2024, we could see more big numbers in the future.
East-West Bank
East-West Bancorp (NYSE:EWBC) is a small U.S. bank with a focus on Asian-American clients. Asian Americans have above-average incomes and good credit scores on average, meaning that this bank’s clientele is unlikely to produce a lot of defaults. Additionally, the bank itself has a mere US$10 billion (about $13.3 billion) market cap, giving it room to grow. And grow it has, booking the following compounded annual growth rates (CAGR) over the last five years:
- Revenue: 11%.
- Net interest income: 12%.
- Net income: 15%.
- Earnings per share: 16%.
It’s been a good run, and it could continue if this Li Lu-owned bank continues with its strong performance.
Citigroup
If you’re not afraid of taking on a little risk, Citigroup (NYSE: C) is one bank stock you could consider. This bank has been struggling lately, with revenue up just 1.5% CAGR and earnings actually down over the last five years. However, this poor performance has resulted in C stock becoming a real bargain bin offering, trading at just 0.5 times book value. To be sure, there is some risk of this bank underperforming if it doesn’t get its house in order. But with Warren Buffett reportedly advising the bank on restructuring, it is in good hands.
