The market is having a tremendous year so far in 2023, with the S&P 500 up nearly 15%. However, bank stocks have missed out on the party.
The broader Financial Select Sector SPDR Fund (NYSEARCA:XLF) is down 1.5% on the year. Smaller banks have fared worse, with the S&P Regional Banking ETF (NYSEARCA:KRE) falling nearly 30% year to date.
Of course, the reason for this is the collapse of three regional banks earlier this year, which spooked depositors and investors alike, causing them to flee. But the U.S. government and larger banks quickly stepped in to avoid a collapse.
While bank stocks have recovered off their 2023 lows, there are still opportunities to find undervalued names by focusing on banks that have consistent and sustainable advantages. In particular, the undervalued bank stocks below should deliver big gains once investor sentiment improves due to their geographic and business model advantages.
Goldman Sachs (GS)
Goldman Sachs (NYSE:GS) is one of the most dominant and respected investment banks in America. However, the stock has struggled over the past two years as the bank sought to get its retail banking unit off the ground and as broader market conditions hurt investment banking operations.
In late 2022, Goldman admitted to its missteps in its consumer banking launch and announced it would pivot its focus away from retail banking and back to its bread-and-butter business of investment banking. Of course, these operations, which include advising firms on mergers and acquisitions and underwriting initial public offerings (IPOs) are highly tied to financial market conditions.
Demand for these services dropped markedly in 2022 as companies attempted to navigate economic uncertainty and a potential recession. For instance, the IPO market froze up last year. But there are signs of life with a number of high-profile stock debuts in recent weeks, including Cava Group (NYSE:CAVA), which went public in mid-June.
While GS stock is up 5% from its March low, it is still down 6.5% year to date. That makes for a solid entry point in this cheap bank stock to buy.
Bank of Hawaii (BOH)
Interestingly, none of the too-big-to-fail American banks are very active in Hawaii’s retail banking market given the state’s smaller size and geographic isolation from the continental United States. Instead, five regional banks accounted for 97% of the state’s total deposits in 2022. Bank of Hawaii (NYSE:BOH) took the No. 2 spot with 33.4% of deposits.
This gives the Bank of Hawaii two advantages when compared to most American banks. First, it consistently earns higher profit margins thanks to the relative lack of competition in its market. Second, Bank of Hawaii’s deposit base should remain stable despite the current industry jitters, as Hawaiians have fewer banks to choose from.
Despite these positives, traders have hammered BOH stock. Shares are down 46% this year and trading for less than 8 times earnings compared with a five-year average of 14.8. They also throw off a generous 6.7% dividend yield, meaning investors get paid to wait for a recovery in this cheap bank stock.
Zions Bancorporation (ZION)
Zions Bancorporation (NASDAQ:ZION) is a unique commercial-focused bank operating primarily in Rocky Mountain states such as Utah. Headquartered in Salt Lake City, it operates as a commercial bank, providing services to small- and mid-sized businesses. These business owners, in turn, tend to maintain non-interest-bearing accounts at Zions as part of their customer relationship, which gives them access to loans and lines of credit from Zions.
This context is important because it highlights Zions’ strong position. It has an unusually high percentage of its deposit base — nearly 45% — where it doesn’t have to pay interest thanks to having commercial rather than retail deposits. Meanwhile, its loan book should reprice quickly and make Zions more money since its assets aren’t tied up in longer-duration loans.
ZION stock is down 40% this year as investors were quick to turn their backs on even the strong regional banks. This puts shares at less than 6 times forward earnings while offering a 6% dividend yield.
I’m not the only one seeing stark undervaluation in Zions. Morningstar analyst Eric Compton believes ZION stock is worth $58 a share, nearly double the current price.
On the date of publication, Ian Bezek held a long position in ZION and GS stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.