The Best-Performing Big Bank Stock in September

Markets Motley Fool

September has been a good month for bank stocks. The KBW Bank Index, which tracks two dozen large-cap bank stocks, has climbed almost 6% since the beginning of the month -- four times better than the S&P 500.

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Among the six biggest banks in the country, all of them have seen their shares trade higher in the month.

Bank

Performance Since Aug. 31, 2017

Citigroup (NYSE: C)

6.72%

Bank of America (NYSE: BAC)

6.57%

Wells Fargo (NYSE: WFC)

6.21%

Morgan Stanley (NYSE: MS)

5.80%

Goldman Sachs (NYSE: GS)

5.13%

JPMorgan Chase (NYSE: JPM)

4.91%

The best-performing big bank stock in September has been Citigroup, which has seen its shares climb 6.7% with only one more trading day left in the month. Bank of America is runner-up, followed by Wells Fargo, Morgan Stanley, Goldman Sachs, and JPMorgan Chase.

It's worth pointing out that shares of Citigroup and Bank of America have two of the lowest valuations on the KBW Bank Index right now, rivaled by only Capital One Financial and New York Community Bancorp. The implication is that all of these banks had more upside potential going into the month than their more richly valued peers.

Most of them also have above-average betas. Bank of America's beta over the past year has been 2.95, according to YCharts.com. That means that it's approximately three times more volatile than the broader market on the typical day. If the market is up by 1%, shares of Bank of America will be up almost 3%.

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There were also a number of positive economic undercurrents that have propelled bank stocks this month. We recently learned that GDP growth last quarter was better than expected, for instance. And just over the past few days, it looks increasingly possible that Congress could lower corporate taxes, which would be a boon to big banks' bottom lines.

The proposal that's making the rounds calls for the top corporate tax rate to be slashed to 20%, down from 35% today. That would save companies like Bank of America, Citigroup, Wells Fargo, and JPMorgan Chase a meaningful amount of money given the $5 billion-plus per quarter that most of these banks earn.

Even a more modest cut would be beneficial. To this end, experts at Morgan Stanley think a 25% corporate tax rate is more likely.

"Given the procedural constraints for achieving a permanent corporate tax rate reduction, and the unattractiveness of a temporary corporate rate cut, our base case is that legislation will ultimately settle closer to a 25 percent rate given the political challenges of embracing the yet unidentified pay fors required to achieve 20 percent," the investment bank wrote in a recent note to clients.

Finally, while the Federal Reserve didn't raise interest rates at its meeting in September, which would have widened banks' lending margins, confidence is growing that it will do so at the end of this year. CME Group's FedWatch Tool estimates a 71% probability for a 25-basis-point hike at its meeting in December.

In short, it was a solid month for bank stocks. How they finish the year will be dependent in part on how their third-quarter earnings turn out, the results of which are due next month.

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John Maxfield owns shares of Bank of America and Wells Fargo. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.