Rising interest rates have put considerable pressure on the banking system. So far we’ve seen two in 2023 collapse of regional banks under macroeconomic pressure and inflation still above the Federal Reserve’s 2% target, financial sector stocks are not keeping pace with broader stock market benchmarks.

The financial industry, represented by the Financial Select Sector SPDR ETF (XLF), has underperformed the overall market and has gained 5% over the past year. Russell 1000 Index yielded a 14% return.

That being said, there are some standouts in this beleaguered sector. Here are the top three financial stocks, each in the categories of best value, fastest growth and strongest performance.

Market performance data and data in the tables below are as of June 9.

Best Value Financial Stocks

These are the financial titles with the lowest in the last 12 months price to earnings (P/E) ratio. Because profits can be returned to shareholders in the form of dividends and buybacksa low P/E ratio indicates that you are paying less for each dollar of profit generated.

Best Value Financial Stocks
Price ($) Market capitalization (market capitalization) ($B) 12-month trailing P/E ratio
Banco Macro SA (BMA) 21.86 1.4 0.14
Jackson Financial Inc (JXN) 30.01 2.5 1.3
Ambac Financial Group Inc (AMBC) 14.04 0.64 1.3

Source: YCharts

  • Banco Macro SA: It is a global bank based in Argentina with a focus on low to middle income customers and small to medium sized companies. On May 17, Banco Macro reported lackluster first-quarter results, with net income down 52% from the previous quarter and down 20% year-on-year. However, operating income increased by 28% year-on-year due to cost cutting.
  • Jackson Financial Inc.: Jackson Financial provides a diverse range of annuity products to US clients. Falling share prices and lower yield on spreads due to variable-rate annuities weighed heavily on Jackson’s core business, with operating profits from its retail annuity operations falling to $356 million in the first quarter of 2023, down from $425 million a year earlier.
  • Ambac Financial Group.: A financial services holding company based in New York. The specialty of Ambac’s core business is a real estate and casualty distribution and underwriting platform. During the first quarter of 2023, Ambac generated gross written premiums of $60.7 million, double the result for the prior-year quarter, driven by strong growth in the Everspan and Cirrata business segments.

Fastest growing financial stocks

These are the best financial stocks by rating and grow a model that ranks companies based on 50/50 weightings of their most recent quarter year-on-year (YOY) percent revenues growth and last quarterly year-on-year earnings per share (EPS) grow.

Both sales and profit are decisive factors for the company’s success. Therefore, evaluating companies by only one growth metric makes the evaluation susceptible to accounting anomalies quarter boy (such as changes in tax laws or restructuring costs) that may cause one or the other value to be unrepresentative of the business in general. Companies with quarterly earnings per share or revenue growth of more than 1,000% were excluded as outliers.

Fastest growing financial stocks
Price ($) Market Cap ($B) EPS growth (%) Income growth (%)
New York Community Bancorp Inc. (NYCB) 10.84 7.8 826 88
UniCredit SpA (INCORRECT) 10.07 37.6 712 14
MidCap Financial Investment Corp. (MFIC) 12.51 0.8 557 324

Source: YCharts

  • New York Community Bancorp Inc.: The company reported first-quarter assets of $123.8 billion, loans of $82.5 billion and deposits of $84.8 billion at the end of April. Despite a challenging operating environment, New York Community Bancorp said it expanded its commercial loan portfolio by 6% in the first quarter of 2023 compared to the previous quarter, while net income available to shareholders rose to $2 billion from $164 million. period thanks to the acquisition of bankrupt Signature Bank.
  • UniCredit SpA: UniCredit is a pan-European commercial bank with offices in Italy, Germany, Central and Eastern Europe, serving 15 million customers worldwide. Net income grew nearly 57% in the first quarter of 2023, while net interest income rose 44% from the prior-year quarter, driven by commercial loan momentum and cost reductions.
  • MidCap Financial Investment Corp.: It is a closed, non-diversified management-investment company that invests in medium-sized companies primarily through mezzanine and senior secured loans.

Financial shares with the greatest dynamics

These are the financial titles that had the highest total return over the past 12 months.

Financial shares with the greatest dynamics
Price ($) Market Cap ($B) 12 month total return (%)
Banco BBVA Argentina SA (BBAR) 5.24 1 101
UniCredit SpA (UNCRY) 10.07 37.6 89
Freedom Holding Corp. (FRHC) 82.41 4.9 85
Russell 1000 ON ON 14
Selected Financial Sector SPDR ETF (XLF) ON ON 5

Source: YCharts

  • Banco BBVA Argentina SA: Banco BBVA, a subsidiary of the BBVA Group, is a leading private financial institution in Argentina. Soaring inflation led Argentina’s central bank to raise its benchmark rate to 97% this year, helping BBVA’s net income grow 82% year-over-year in the first quarter of 2023. However, its inflation-adjusted net income was $15 billion, up almost 28% less than in the fourth quarter of 2022.
  • UniCredit: See description above.
  • Freedom Holding Corp.: Freedom is a Nevada-based financial services holding company engaged in retail securities brokerage, investment research and advisory, securities trading, investment banking and underwriting services in Europe and Central Asia. In February, Freedom completed the full sale of its Russian business for $140 million, while its CEO and founder renounced his Russian citizenship following the invasion of Ukraine.

Key trends in the financial sector

Recently, Moody’s lowered the outlook for the US banking sector from stable to negative. Moody’s predicts a recession on the 2023 horizon and is less than optimistic about domestic financial conditions, as the Fed funds rate is expected to remain in the 5.25% to 5.5% range, even as inflation falls to 3% and real gross domestic product (GDP) growth continues to decline.

In addition, Moody’s predicts that high interest rates will lead to higher debt servicing costs, while banks facing deposit outflows will be forced to pay higher rates on deposits to keep them, which will squeeze net interest margins. Still, Moody’s credits the banks for being well capitalized in the face of worsening macroeconomic conditions and noted government measures on liquidity available to the eight largest banks.

The effect of interest rates on financial stocks

Financial stocks usually benefit from growth interest rates through increased profit margins, increased business activity and greater return on investment.

Increased profit margins: Rising interest rates allow banks to expand net interest margin between what they pay to depositors and what they receive from borrowers. Rising interest rates often translate into higher stock prices for financial stocks. For example, the sector gained more than 20% year-on-year in 2017 federal funds rate higher throughout that year.

Business activity: Financial institutions that offer securities trading, such as investment banks and brokerages, often see an increase in trading activity when interest rates rise due to positive investor sentiment. One exception to this rule occurred during the pandemic, when interest rates were at record lows. Brokerage firms enjoyed record trading volumes during this period as government-armed co-op investors stimulation controls they spent their time and money trading the stock market.

Return on investment: Rising rates also allow financial institutions to earn higher interest on their earning assets. For example, insurance companies they have greater gains during rate-hike cycles because their underlying bond investments generate higher returns. Insurance companies usually hold a lot of safe debt fixed interest securities to cover their policies.

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