Every successful sports team needs a powerful offense and a robust defense. In the Super Bowl this past weekend, both the victorious Los Angeles Rams and surprise challenger Cincinnati Bengals pushed their aggressive offenses to score points while using their defenses to maintain their leads. While some commentators talk about how a strong offense always wins over a strong defense (or is it the other way around?), the reality is that a successful team must have both.
Investing is no different. Good investors recognize when it is time to get more aggressive with their offense. This might mean buying growth stocks in a robust bull market when scoring big is possible. Similarly, they recognize when conditions warrant putting a strong defense on the field when opportunities become more limited, such as when the stock market becomes overly expensive. Like successful football coaches, successful investors develop their own unique offenses and defenses, learn when to use which one, and evaluate how aggressive or defensive they should be at any given time.
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The past two years following the pandemic have clearly favored a strong offense in investing. But as aggressive growth stocks got overplayed, they lost their momentum, then their effectiveness collapsed. Today, staying with an overly aggressive offense could lead to fumbles, interceptions, sacks and losses. The game is more challenging now, so better balance is required to hold onto points. This means putting some defense on the field.
Bank stocks offer a traditionally effective investment defense. Shares of many of these businesses remain inexpensive and offer generous dividend yields. Their earnings should benefit from rising interest rates, as they can earn more on their loans while likely keeping deposit interest rates at very low levels. Also, inflation boosts the value of their collateral, including homes and cars, which can help reduce credit losses. Like all defenses, there are potential holes that bring risk, including higher credit losses and lower interest rates if the economy slips into a recession.
But the current environment looks quite favorable for defensive bank stocks. Listed below are two that have appeal:
2 Defensive Bank Stocks to Consider
Defensive Bank Stock #1: M&T Bank Corporation (MTB)
M&T (MTB) is a major regional bank based in Buffalo, New York, with $155 billion in assets. The company is led by highly-regarded chairman and CEO Rene Jones, who has been part of the bank’s senior leadership team since 2005. M&T has a strong business and consumer franchise, with over 700 branches, that emphasizes local market knowledge yet has the resources and capabilities that smaller banks can’t match. The bank produces healthy profits and returns on capital. It is a conservative lender, as highlighted by its history of modest loan losses, while its capital strength is robust with a CET1 capital ratio of 11.4%. M&T is acquiring People’s United Financial (PBCT), which will expand its geographical reach. MTB shares trade at a very reasonable 12.4x post-merger 2023 earnings and offer a 2.6% dividend yield.
Defensive Bank Stock #2: Huntington Bancshares (HBAN)
Columbus, Ohio-based Huntington Bancshares (HBAN) is a major regional bank with $174 billion in assets. Its acquisition program, which recently added TCF Financial, expanded the bank’s market base to cover much of the Midwest, from Minnesota to Pennsylvania, as well as Florida and Colorado. The integration of its deals has gone well, so Huntington should be able to continue expanding while keeping expenses under control. The bank’s push to make banking more customer-friendly, with its noted programs that slashed highly disliked overdraft and other fees, is earning it high marks and increased business. And, unlike many peers, Huntington is generating loan growth, reflected in its commercial loan balances which grew at an impressive 4% pace in the fourth quarter. Capital strength is lighter, at 9.3%, than many peers, but its robust reserves relative to modest credit losses add an additional buffer of protection. HBAN shares trade at 10.9x post-merger 2023 earnings and pay a 3.9% dividend yield.
Two investment advisories which I oversee – Cabot Turnaround Letter and Cabot Undervalued Stocks Advisor – focus exclusively on buying shares of out-of-favor publicly-traded companies with solid value. To learn what companies I’m recommending today, click here.
Do you own any defensive bank stocks in your portfolio? Which ones? Tell us about them in the comments below.
Bruce has more than 25 years of value investing experience, managing institutional portfolios, mutual funds, and private client accounts. He has led two successful investment platform turnarounds, co-founded an investment management firm, and was principal of a $3 billion (AUM) employee-owned investment management company. Now he is helping his Cabot Undervalued Stocks Advisor readers find those undervalued stocks that let you buy low and sell high!Learn More >>