The banking industry hasn't exactly been the best place to invest in recent years, as rising rates have compressed interest margins, and recession fears have kept many investors away. However, there are some interesting bank stocks for long-term investors to look at right now.
With rates expected to start gradually falling later this year and the best-case "soft landing" in the economy looking more likely than it did just a few months ago, now could be a smart time to add some bank exposure to your portfolio. If you have $1,000 (or more) on the sidelines, here are two bank stocks in particular that could be worth a closer look for patient investors right now.
An interesting situation with lots of upside potential
Capital One(NYSE: COF) is a bank stock that has jumped to the top of my watch list recently, and not only because it trades for a 10% discount to its book value.
For one thing, Capital One's business is a highly profitable one. Because of its focus on (high interest) credit card products instead of the mortgages and auto loans than many other banks specialize in, Capital One's net interest margin (NIM) is 6.7%. This is more than twice the NIM of any of the other big banks, and the business could thrive as interest rates fall and consumer confidence improves.
However, perhaps the most compelling reason is Capital One's pending acquisition of Discover(NYSE: DFS), which could be a major catalyst for a few reasons:
- It will add about 300 million credit card accounts, $20 billion in private student loans, and $87 billion in consumer deposits to Capital One.
- It creates a more complete credit card portfolio, as both companies offer cards the other doesn't compete with.
- It creates expense synergies. Not only are there natural economies of scale, but Capital One has a lower deposit cost structure than Discover.
While all of these are net positives for Capital One, the most interesting part of the deal is that Discover owns its payment network. Capital One plans to move some of its own card volume to Discover's network and is anticipating $1.2 billion in network synergies by 2027. Beyond this, Capital One could potentially grow Discover's network and make money from interchange fees like Visa(NYSE: V) and Mastercard (NYSE: MA).
Could it finally be time for this bank to get back to business as usual?
Wells Fargo(NYSE: WFC) has actually been one of the better performers in the financial sector so far in 2024. The economy has been more resilient than many had expected, and as the most consumer-focused of the megabanks, Wells Fargo has rebounded nicely after a turbulent 2023. But despite the outperformance, there's a lot to like about the bank stock going forward.
For one thing, Wells Fargo's interest margins have been compressed in the rising-rate environment. Think of it this way -- with mostly fixed-rate loans on its balance sheet and a rising deposit cost, Wells Fargo's cost of money has increased faster than the yields it generates. This contrasts with Capital One, which focuses on variable-rate credit card loans. But if interest rates start to fall later this year, as most experts predict, Wells Fargo could be one of the biggest winners.
Also, while the bank's "fake accounts" scandal might seem like a long time ago, the penalty that has been in place for about six years that prevents the bank from growing remains. However, there's reason to believe that it could finally be lifted as soon as 2025, and this could be a big deal, as it allows the bank to invest more freely to grow its consumer and wealth management businesses.
Wells Fargo has been buying back stock aggressively in recent years and growing its dividend. Despite rising by about 150% in the past four years, it still trades for about 1.3 times book value, compared with about 1.6 times book value before the asset cap was put into place.
Invest with the long term in mind
While both of these stocks look extremely interesting from a long-term perspective, it's important to keep in mind that both can (and likely will) be rather volatile over shorter periods. There are plenty of factors outside of their control that could cause the stock to spike higher or lower, but I'm confident that investors who measure their returns in multiyear periods will be glad they bought at these levels.
Should you invest $1,000 in Capital One Financial right now?
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Discover Financial Services is an advertising partner of The Ascent, a Motley Fool company. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Matt Frankel has positions in Wells Fargo. The Motley Fool has positions in and recommends Mastercard and Visa. The Motley Fool recommends Discover Financial Services and recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
