3 Bank Stocks to Buy

By Sean O'Reilly, Sean Williams, and Matthew FrankelMarketsFool.com

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Bank stocks have been on an absolute tear in the past month following the election of real estate mogul Donald Trump as president of the United States. Shares in JPMorgan Chaseare up over 18% since Nov. 9, Bank of America (NYSE: BAC) is up a whopping 26%, and even the currently scandal-embroiled Wells Fargo has seen its shares rise 21% in anticipation of financial deregulation under President Trump. After run-ups like these, is it possible that investors looking to get in on the banking sector have missed the boat? Or is the party just getting started? We asked some of the Fool's best and brightest and they did us one better: They offered up three banks for Foolish investors to consider stuffing their stockings with:New York Community Bancorp(NYSE: NYCB),Bank of New York Mellon (NYSE: BK), and Bank of America.Read on to find out why these three banks are great portfolio additions as we head into 2017.

How does an extra $7.5 billion in net interest income sound?

Sean Williams (Bank of America): Yeah, it's a complete homer pick since it's a long-term holding in my portfolio, and it's also the best-performing money-center bank since the election results were announced, but Bank of Americalooks as though it may finally be finding its stride. It's also my favorite bank stock for investors to consider buying in December.

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Over the past three-plus weeks, we've witnessed a substantial jump in bond yields as investors have exited bonds. This comes on the heels of stronger-than-expected U.S. GDP data and consistent jobs data that led to a December rate hike from the Federal Reserve. Of all the U.S. money-center banks, none stands to benefit more from a 100-basis-point move higher in both short- and long-term interest rates than Bank of America. In its summer 10-Q filing, Bank of America estimated that a 100-basis-point move in both short- and long-term rates would add $7.5 billion in annual net interest income.

On the other side of the equation, Bank of America is seeing a marked decline in its expenses, and investors are enjoying considerably better earnings transparency. The vast majority of recession-related legal expenses are in the rearview mirror, which is helping minimize costs, while at the same time Bank of America is emphasizing the use of its mobile applications and closing a small percentage of its physical branches to save on overhead costs. Altogether, reduced expenses and overhead combined with the estimated $7.5 billion in extra net interest income could yield $0.70-plus in added annual earnings per share in just a few years.

I also happen to like Bank of America because I believe it has the best shot at substantially increasing its dividend. Its current payout ratio is just 20%, and it's been mostly held back by Fed regulations. If Trump winds up removing or easing some of the regulations governing the banking sector, we could not only see expenses fall for B of A, but we may see a rapid increase in shareholder yield as it looks to boost its payout.

Lastly, I view Bank of America as the smartest choice to take advantage of the expectation of rising interest rates since Wells Fargois still in PR damage control from its account-fraud scandal, Citigroup is still heavily tied to Europe, which remains weak in the wake of Brexit, and JPMorgan Chasewouldn't receive anywhere near the same net interest income boost (it could add $3 billion) as B of A if short- and long-term lending rates rose by 100 basis points. In my opinion as a shareholder, Bank of America could still have 40% upside over the coming two to three years, not to mention a significantly higher payout.

A storied history and a bright future

Sean O'Reilly (Bank of New York Mellon):Bank of New York Mellon, formed in 1997 in the merger of The Bank of New York and Mellon Corporation, not only has a rich history but a multi-century record of rewarding shareholders to boot. The Bank of New York was founded in the 1780s by none other than our nation's first Treasury secretary, Alexander Hamilton, while Mellon Corporation was the flagship bank of the elite Mellon banking family.The Bank of New York has been around practically since the United States was born, and Mellon Corp., founded in 1869 by Thomas Mellon and his two sons, became inexorably linked to the industrialization of the young nation in the decades following the Civil War. It was practically fate that the two would one day merge.

Possibly owing to its rich roots, BNYM is not your typical bank. Whereas most banks have almost all of their assets invested in consumer and commercial loans, BNY Mellon happens to be the largest custodian bank in the world. It boasts over $30 trillion in assets held in trust, $1.7 trillion in assets under management, a corporate balance sheet of $374 billion, and a workforce over 50,000 strong.

With over two centuries of experience under its belt, and having seen everything from the Great Depression to world wars, it's little wonder that BNY Mellon is the trusted name for countless investors, organizations, and high-net-worth individuals. Which leads us to the other curious aspect of BNY Mellon as a stock: It's relatively expensive on a price-to-book valuation (P/B of 1.32 as of Dec. 21), especially when one considers its respectable but not spectacular return on assets of 0.9% over the last 12 months. This is high when you consider that Wells Fargo currently sports a P/B of 1.39 and a return on assets of 1.2% in the last 12 months. However, as explained earlier this year by Fool contributor John Maxfield, there is a reason for this: Investors are willing to pay up for certainty, and there are few banking institutions that are as sure a bet as BNY Mellon. As a custodian, making very few actual loans (real estate loans, the bread and butter of many a bank, were just 4% of total loans at the end of fiscal 2015, for example), BNY Mellon acts as a middleman in every sense of the word.

As a custodial bank, it has two ways it can increase profits: (1) increase assets under management (a tall order, given its current size), or, more likely, (2) cut costs and become more efficient. And it is with this last method that our bull case lies.

BNY Mellon is working hard to reduce its footprint (at least as far as physical locations go) and investing heavily to streamline its core custodial operations. These initiatives, coupled with a continued move away from risky real-estate-based loans, will make for an increasingly profitable enterprise. Analysts polled by S&P Global Market Intelligence estimate that earnings per share should rise from $3.15 this year to $3.78 by fiscal 2018. With shares trading at $47, and the bank's enviable position as the world's largest custodial bank, BNY Mellon is more than worthy of consideration by Foolish investors looking for a great way to ring in the new year.

This niche lender could outperform in 2017

Matthew Frankel (New York Community Bancorp):

New York Community Bancorp is a niche lender, specializing in rent-controlled multifamily properties in New York City, and the business model has worked well for the bank and its shareholders. After all, tenants tend to stay in rent-controlled apartments, which makes these buildings rather recession-proof and default-resistant. This has led to some of the lowest charge-off rates in the industry, even during the Savings and Loan Crisis and the Great Recession.

Although NYCB, as most of the banking sector, has benefited from the "Trump rally," the company's stock has significantly underperformed the financial sector in 2016.

NYCB data by YCharts.

The main reason for the lousy performance throughout the year was NYCB's pending merger withAstoria Financial(NYSE: AF).First off, Astoria doesn't enjoy the same competitive advantages as NYCB, and therefore isn't nearly as efficient. Second, the merger would have pushed NYCB's assets well beyond the $50 billion threshold that would make the bank a systemically important financial institution and therefore subject it to stress test requirements and other costly regulatory standards.

However, the Astoria merger agreement was recently terminated, so NYCB can go back to doing what it does best lending on rent-controlled NYC apartment buildings and running one of the most efficient and high-quality banking operations in the market.

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*StockAdvisor returns as of December 12, 2016The author(s) may have a position in any stocks mentioned.

Matthew Frankel owns shares of Bank of America and New York Community Bancorp. Sean O'Reilly has no position in any stocks mentioned. Sean Williams owns shares of Bank of America. The Motley Fool has no position in any of the stocks mentioned. 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.