2 Stocks to Buy During a Market Correction: Bank of America and Citigroup
When it comes to big bank stocks, it's hard to make the case that Citigroup and Bank of Americaaren't cheap. On a price-to-book value basis, both banks look attractively valued on both a current absolute basis and compared to historical multiples.
However, many so-called market experts and pundits are calling for an overall market correction of 10% or more. Some cite the recent declines as the beginning of that drop.
If that correction does happen, I believe it could create an incredible buying opportunity in these two banks. Let's take a look specifically at what makes the banks so "cheap," their capital levels, and some risks specific to Citigroup.
Both Citigroup and Bank of America trade at very low valuation multiples. B of A trades at 1.18 times its tangible book value, while Citigroup is even cheaper, at just 0.84 times tangible book.
Prior to the financial crisis, both banks traded at P/TBV multiples of three to four, but we can probably chalk that up to being unrealistically high due to the housing bubble. Ratios of around two are a more realistic target, as this is where they were before the housing market started to rocket upwards in the 2000's.
Those ever-important capital levels
Both banks performed decently in the recent Comprehensive Capital Analysis and Review (CCAR) -- aka, the stress tests. Bank of America did indeed pass, though its passing score was a bit close for comfort, and the bank had to ratchet back its capital-return plans to be able to pass the test at all.
Citigroup's minimum capital levels, on the other hand, passed by a wider margin. However, the bank had some issues related to the process around its capital planning and preparation of its CCAR submission. As a result, its capital plan was rejected by the Federal Reserve.
In addition, as you can see in the chart below, both banks "passed" by a considerably smaller margin than they did last year.
Despite this less-than-wowing performance, both banks are on the path to greater balance-sheet strength. Both have significantly improved the quality of their assets since the crisis, and while there is still a ways to go, the situation is better than it was.
Also, both banks have settled a great many lingering legal issues stemming from the crisis. Case in point: After Bank of America's recent settlement with the Federal Housing Finance Agency, the company emphasized that the vast majority of legal exposure is now behind them.
Citigroup's unique risks
While both of these banks look cheap to me, it's clear that Citigroup trades at a substantial discount to Bank of America, and there are clear reasons for that discrepancy.
Citigroup has tremendous international exposure which opens it up to credit risks -- particularly in emerging markets -- that Bank of America doesn't face. The uncertainty surrounding Citigroup's global operations was a chief reason that the Fed was concerned about Citigroup's capital planning process. Also, Citi's retail deposit base is much smaller than the other large U.S. banks, which could cause liquidity issues in the event of another global financial crisis.
That said, I think the risk is more than priced into the stock, as it is trades well below the value of its tangible net worth.
What the impact of a drop would look like
The exact magnitude and timing of a market correction is anyone's guess, but to put things in perspective let's consider the 10% drop in stocks that would be required for traders to call it a "true correction."
If both Bank of America and Citigroup fell by that much, it would mean a share price of less than $43 for Citigroup and under $15 for Bank of America. That would work out to a P/TBV of 0.76 and 1.1, respectively. A larger correction would produce an even bigger discount.
While both banks are a good deal right here and now, they are definitely worth keeping an eye on for even better buying opportunities if the market does happen to "correct."
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The article 2 Stocks to Buy During a Market Correction: Bank of America and Citigroup originally appeared on Fool.com.Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America and Citigroup. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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