Rising interest rates have introduced significant stress into the banking system. So far in 2023, we’ve already seen two regional banks collapse under macroeconomic strain, and with inflation still above the Federal Reserve’s 2% target, financial-sector stocks aren’t keeping up with broader stock market benchmarks.
The financial industry, as represented by the Financial Select Sector SPDR ETF (XLF), has underperformed the overall market, gaining 5% over the past year as the Russell 1000 Index has delivered a 14% return.
That being said, there are a few standouts in this beleaguered sector. Here are the top three financial stocks each in the categories of the best value, the fastest growth, and the strongest performance.
Market performance figures and the data in the tables below are as of June 9.
Best Value Financial Stocks
These are the financial stocks with the lowest 12-month trailing price-to-earnings (P/E) ratio. Because profits can be returned to shareholders in the form of dividends and buybacks, a low P/E ratio shows you’re paying less for each dollar of profit generated.
| Best Value Financial Stocks | |||
|---|---|---|---|
| Price ($) | Market Capitalization (Market Cap) ($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: This is a global bank based out of Argentina, with a focus on low- to middle-income customers, and small to mid-sized companies. On May 17, Banco Macro announced lackluster first-quarter results, with net income falling 52% from the prior quarter and 20% year-over-year. However, operating income increased 28% year-over-year due to cost-cutting.
- Jackson Financial Inc.: Jackson Financial provides a diverse range of annuity products to U.S. clients. Falling equity prices and lower spread income due to variable-rate annuities, weighed heavily on Jackson’s core business, with annuity retail operating earnings falling to $356 million in the first quarter of 2023, down from $425 million in the prior year.
- Ambac Financial Group.: A financial services holding company based in New York. Ambac’s specialty core business is a property and casualty distribution and underwriting platform. During the first quarter of 2023, Ambac generated $60.7 million gross premiums written, double the year-ago quarter’s result, driven by strong growth in its Everspan and Cirrata business segments.
Fastest-Growing Financial Stocks
These are the top financial stocks as ranked by a growth model that scores companies based on a 50/50 weighting of their most recent quarterly year-over-year (YOY) percentage revenue growth and most recent quarterly YOY earnings-per-share (EPS) growth.
Both sales and earnings are critical factors in the success of a company. Therefore, ranking companies by only one growth metric makes a ranking susceptible to the accounting anomalies of that quarter (such as changes in tax law or restructuring costs) that may make one figure or the other unrepresentative of the business in general. Companies with quarterly EPS or revenue growth of more than 1,000% were excluded as outliers.
| Fastest-Growing Financial Stocks | ||||
|---|---|---|---|---|
| Price ($) | Market Cap ($B) | EPS Growth (%) | Revenue Growth (%) | |
| New York Community Bancorp Inc. (NYCB) | 10.84 | 7.8 | 826 | 88 |
| UniCredit SpA (UNCRY) | 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 in late April reported $123.8 billion in assets, $82.5 billion in loans, and deposits of $84.8 billion for its first quarter. Despite a challenging operational environment, New York Community Bancorp said it expanded its commercial loan portfolio by 6% in the first quarter of 2023, compared with the prior quarter, while net income available to shareholders surged to $2 billion from $164 million, across the same period, thanks to its acquisition of failed Signature Bank.
- UniCredit SpA: UniCredit is a pan-European commercial bank, with a presence in Italy, Germany, Central and Eastern Europe, serving 15 million customers worldwide. Net revenue increased nearly 57% in the first quarter of 2023 while net interest income rose 44% from the prior-year quarter, driven by commercial lending momentum and cost reductions.
- MidCap Financial Investment Corp.: This is a closed-end, non-diversified management-investment company that invests in middle-market companies primarily through mezzanine and senior secured loans.
Financial Stocks With the Most Momentum
These are the financial stocks that had the highest total return over the past 12 months.
| Financial Stocks With the Most Momentum | |||
|---|---|---|---|
| Price ($) | Market Cap ($B) | 12-Month Trailing 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 | N/A | N/A | 14 |
| Financial Select Sector SPDR ETF (XLF) | N/A | N/A | 5 |
Source: YCharts
- Banco BBVA Argentina SA: A subsidiary of BBVA Group, Banco BBVA is a leading private financial institution in Argentina. Rampant inflation led the Argentine central bank to raise its benchmark rate to 97% this year, which contributed to BBVA’s net income growth of 82% year-over-year in the first quarter of 2023. However, its inflation-adjusted net income was $15 billion, down nearly 28% from the fourth quarter of 2022.
- UniCredit: See description above.
- Freedom Holding Corp.: Freedom is a Nevada-based financial services holding company, operating a retail securities brokerage, investment research and counseling, securities trading, investment banking, and underwriting services in Europe and Central Asia. In February, Freedom completed the full divestiture 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 downgraded the U.S. banking sector’s outlook to negative from stable. Forecasting a recession on the horizon for 2023, Moody’s is less than optimistic about domestic financial conditions, as the fed funds rate is expected to remain within the 5.25% to 5.5% range, even as inflation declines to 3% and real gross domestic product (GDP) growth continues to fall.
Moreover, Moody’s anticipates that high interest rates will cause debt-servicing costs to rise, while banks facing deposit outflows will be forced to pay higher deposit rates to hold on to customers, straining net interest margins. Yet Moody’s does credit the banks for being well-capitalized in the face of deteriorating macro conditions, and noted the government liquidity provisions available to the eight largest banks.
The Impact of Interest Rates on Financial Stocks
Financial stocks typically benefit from rising interest rates through increased profit margins, heightened trading activity, and greater investment returns.
Increased profit margins: Rising interest rates allow banks to widen the net interest margin between what they pay depositors and receive from borrowers. Often, rising interest rates translate into higher share prices for financial stocks. For example, the sector gained more than 20% in 2017, following the federal funds rate higher throughout that year.
Trading activity: Financial institutions that offer securities trading, such as investment banks and brokers, often see trading activity increase when interest rates rise, as a result of positive investor sentiment. One exception to this rule of thumb occurred during the pandemic, when there were record-low interest rates. Brokerage firms enjoyed unprecedented trading volumes during this period as cooped-up investors armed with government stimulus checks spent their time and money trading the stock market.
Investment returns: Rising rates also allow financial institutions to earn higher interest on their yielding assets. For instance, insurance companies enjoy greater profits during rate-hike cycles because their underlying bond investments yield greater returns. Insurers typically hold lots of safe debt like fixed-interest securities to back their insurance policies.
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