We began by focusing on the 69 banks that recently appeared on the Reuters Select stock screens. Since we are interested in only large-cap names, we then limited our search to banks that have market capitalizations in excess of $5 billion. This shortened our list to only five banks.
We want banks that are priced at reasonable valuations on the basis of key metrics. For this reason we honed in on the banks that appeared on screens in the value category. This left us with Wells Fargo & Co. (NYSE:WFC), a money center bank, and Synovus Financial Corp., a large regional bank.
As indicated below, Synovus is trading at a slightly lower valuation than Wells Fargo on the basis of price to earnings [P/E] and P/Sales relative to their respective industries.
It is important to remember that banks have different financial statements than other companies. Whereas other industries have sales or revenues, the top line of a bank is interest income, which is interest earned on loans and mortgages that are issued by the bank. Thus, when comparing P/Sales ratios for banks, the true comparison is P/interest income.
Synovus's relatively lower P/E and P/interest income ratios priced the bank cheaper than Wells Fargo, and helped it land on the Relative Value stock screen. The screen looks for companies that are trading at reasonable valuations when stacked up next to their respective industry averages. It requires that a company's P/E, P/Sales, and P/Cash Flow ratios are no more than 10 percent above the industry averages. As indicated above, Synovus clears this hurdle. By comparison, Wells Fargo's P/E is currently 14 percent above the norm for the money center bank industry.
Looking deeper, we see that Synovus has been growing its interest income at a clip that is not only faster than Wells Fargo's pace, but is also faster than the average for the regional bank industry in the trailing 12-month [TTM)] and most recent quarter [MRQ] periods. This improvement in interest income helped Synovus also land on the Sales Growth Leaders screen, which looks for companies that have posted industry-leading MRQ and TTM revenue growth rates.
As indicated above, Synovus's superior revenue growth rates also helped the bank post superior improvement in its earnings per share [EPS] in the MRQ and TTM periods, which secures the bank's position on the Sales Growth Leaders screen.
At the time of publication, Erik Dellith did not own shares of any company mentioned in this article. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.
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