2 banking stocks that could be huge winners for patient investors


The 2022 market downturn affected almost every sector of the stock market, and bank stocks were certainly no exception. Recession fears have led investors to fear a drop in loan demand and a rise in loan defaults.

While these concerns are certainly legitimate, there are also some very exciting opportunities in banking right now. Two in particular that seem interesting are Bank of America (BAC 0.72%) and Allied Financial (ALLY 4.96%)both of which are trading at cheap valuations and could significantly increase their earnings over the next few years.

Bank of America could see billions in revenue increase

The largest bank in the United States by deposits, Bank of America is a massive institution. It has $3.24 trillion in total assets, $2.07 trillion in deposits, and $978 billion in loans. Recent growth has been impressive, with the loan portfolio growing 10% year-over-year in the first quarter and deposits growing 13% over the same period.

Certainly, Bank of America is not immune inflation and recessions. But with the stock down nearly 35% from its recent high and trading at less than 1.1x book value, the negative effects of the current economic climate are likely priced in at this point.

Additionally, Bank of America is better positioned than most of its peers to benefit to of a rising interest rate environment. The bank has about $800 billion in deposits that don’t bear interest, so as the rates it can charge on loans go up, profit margins widen. In fact, management has estimated that a 1 percentage point rise in interest rates could result in $5.4 billion in additional net interest income per year.

Ally is a cheap and profitable banking stock with plenty of room for growth

Ally Financial isn’t as well known as Bank of America, but it’s one of the most attractive banking stocks from a value perspective.

If you’re not familiar, Ally was once General Motors(GM 5.55%) financing division of GMAC and was spun off following the financial crisis. So it shouldn’t come as too much of a surprise that the bulk of Ally’s lending operations are in the automotive sector.

In the first quarter, Ally issued $11.6 billion in auto loans. The bank also operates an auto insurance business and offers mortgages, credit cards, and business loans.

On the deposit side, the bank has 2.5 million retail customers with a total of $136 billion in deposits, as well as an investment platform that offers both robo-advisory and traditional brokerage services. And it does all of this without any bank branches.

Because Ally doesn’t have to worry about an expensive branch network and because it focuses on car loans (which have an average interest rate above 7%), it’s a bank very profitable. It has a net interest margin of nearly 4%, where most banks are between 2% and 3%, and its return on equity is well above the industry average.

The company is aggressively buying back shares and paying dividends with its earnings. Ally trades for just five times earnings over the past 12 months and for just over book value, a remarkably cheap price considering its profitability.

Buy for the long term

It is important to point out that the stock market continues to have a very volatile 2022, and many experts predict a recession in the next year. So it’s fair to say that there’s quite a bit of short-term uncertainty in the market and both of these bank stocks could be volatile. They’re both well-run banks with attractive valuations and plenty of room to boost earnings, but it’s wise to expect a bit of a rollercoaster ride as the current economic troubles unfold.

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