With expectations that interest rates could rise further, analysts are looking for "safe haven" bank stocks where investors can ride out a fresh downturn and remain in the banking sector.
But the job has been complicated by the difficult year that many bank issues have endured. The Federal Reserve's three rate hikes this year have led to a significant valuation gap in favor of shares of banks with less interest-sensitive business mixes.
"Banks less dependent on overall lending and focused more on recurring fee income definitely hold up better in this kind of environment, but the market has already begun differentiating on that basis," said Frank W. Anderson, an independent bank analyst in Plano, Tex.
"The market tends to value a dollar of net income from the trust and asset management business at a higher price-to-earnings multiple than a dollar from the commercial banking business," said Derek J. Statkevicus of Keefe, Bruyette & Woods Inc. in New York.
Indeed, shares of trust- and custody-oriented institutions are up over 6% this year, while bank stocks overall are down about that much - and some by considerably more, according to Keefe Bruyette's figures. Companies in this category have an overall 21.8 multiple, versus a 12 multiple for other banks.
Chicago's Northern Trust Corp. is ahead 10% in value this year and Mellon Financial Corp. by 6%, while State Street Corp and U.S. Trust Corp. have each improved by 5%. Bank of New York Co. has also been a relatively good performer this year.
Among more diversified banking companies the clear standout is Wells Fargo & Co., whose shares are up over 15% this year. Fifth Third Bancorp. has not done as well, but still is richly priced relative to its peers.
"Wells Fargo is as well positioned as anybody in the sector, but trades at a high multiple relative to the group," said Mr. Anderson. Portfolio managers will take a look and say, 'Yes, it's well positioned, but look at where it already trades.' " Wells Fargo currently has a 29 multiple.
One overlooked safe haven may be Delaware's Wilmington Trust Corp., according to Mr. Statkevicus. The company has long been a significant player in trust, custody, and investment management, with $145 billion of assets in these areas, but currently trades at a relatively modest 13.6 multiple.
"We believe current stock prices do not reflect full value of the trust and asset management business," the analyst said. The stock traded Monday afternoon at $48.3125, not that far above its 12-month low of $46.75.
In addition, Mr. Statkevicus said, Wilmington Trust fills the bill as a safe-haven bank stock because of its "strong credit quality, reduced dependence on interest income, and consistent financial performance."