Bank stocks can play a valuable role in a portfolio. Not only can they provide strong capital appreciation during economic expansions, but they can also be a reliable source of dividend income. Not all banks are created equal, however, and it can pay to be selective when investing in this sector. With that in mind, here are some of my top picks in the banking space right now. 

Barclays 

On the London Stock Exchange, Barclays (BARC:LON) is my top banking stock today. In my view, it has a number of things going for it. 

One is that it has exposure to both the UK and the US. So, it’s more diversified geographically than banks like Lloyds and NatWest, which are predominantly focused on the UK.  

Another is that it has operations across investment banking, equity and fixed income trading, and wealth management, so it has many ways to generate income. Note that it is an underwriter on the upcoming Anthropic IPO – this listing should bring in substantial fees. 

A third attraction is that the stock is very cheap – right now it’s trading on a P/E ratio of just 8.5. At that multiple, the stock looks undervalued (the average analyst price target is about 30% above the current share price).  

Of course, the fact that it has many moving parts introduces risks – this is a complex institution. Overall though, the risk/reward proposition looks compelling to me. 

HSBC

Also on the LSE, I like HSBC (HSBA:LON). It’s the largest bank in the FTSE 100 today with a market cap of around £225 billion. 

Like Barclays, HSBC is diversified geographically. It has a lot of exposure to Asia – an area of the world that has significant long-term potential from a banking perspective. 

It’s also trading quite cheaply. At present, the P/E ratio here is about 10.6. 

One other attraction of HSBC is its dividend yield. It currently sits at around 4.7% so the stock could be a great source of income. 

On the downside, HSBC’s exposure to Asia introduces some geopolitical risks. For example, heightened tensions between the US and China could create challenges for the firm. 

With the stock having fallen from near 1,600p in early September to 1,330p today, however, I think the set-up is attractive. I see the potential for solid returns from here when dividends are factored in. 

JP Morgan

Turning to the US market, my top pick here is JP Morgan (JPM:NYSE). A powerhouse of the sector, it’s generally regarded as one of the best banks in the world. 

An attraction of this bank is its prowess in investment banking. Here, it is the global leader and tends to play a key role in all the big IPOs (it’s a major underwriter for the Anthropic IPO). 

Another is its massive wealth management division. Last quarter, this generated revenue of $6.9 billion. 

An additional attraction here is that the bank is fast becoming a technology company. This is a firm with its own AI models, its own cloud operations, and its own blockchain technology. 

Now, this stock is a little bit more expensive than the UK bank stocks I’ve mentioned. It currently has a P/E ratio of about 14.2.

I think that’s quite a reasonable valuation, however, given the quality here. Especially given the fact that the bank is increasingly operating like a tech company.  

Morgan Stanley 

Also in the US market, I like Morgan Stanley (MS:NYSE). It’s a huge player in both wealth management and investment banking. 

The jewel in the crown here is the company’s wealth management business, which serves a tiered spectrum of clientele, ranging from mass-affluent investors to ultra-high-net-worth (UHNW) families and institutions. Last quarter, this brought in revenue of $9.1 billion (versus $8.2 billion a year earlier). 

But the company’s investment banking operations are also a major attraction. This bank was a lead underwriter on the SpaceX IPO and it’s going to be a lead underwriter on Anthropic too. 

The P/E ratio here is about 15.1, so it’s one of the more expensive large-cap bank stocks. I think this valuation is justified, however, as the bank faces significantly lower credit risk than many of its peers due to the fact that it doesn’t offer regular retail banking. 

Nu Holdings 

Finally, looking outside the traditional, large-cap banks, I like Nu Holdings (NU:NYSE). Listed on the New York Stock Exchange, it’s the largest digital bank in Latin America. 

This company is growing at a far faster rate than the traditional banks. Over the last three years, for example, its revenue has climbed from $4.8 billion to $15.8 billion. 

One driver of this growth is customer acquisition. Today, Nu has about 140 million customers versus around 35 million at the end of 2020. 

Another is expansion into new countries. After initially having a lot of success in Brazil, it has expanded into Mexico and Colombia. 

Looking beyond this growth, a key attraction of Nu is its unit economics. Because it’s a digital bank with no branches, it’s able to operate far more efficiently than the traditional banks. 

Another is that it has conditional approval for a US bank charter. If a charter is granted, the bank plans to eventually offer deposit accounts, credit cards, lending, and digital asset custody services in the US, so this could be a whole new market for the bank. 

Now, obviously there are some geographic risks here – the Latin American countries can be volatile. However, with the stock down nearly 30% this year and currently trading near $12 (versus the average analyst price target of $18.80), I like the risk/reward skew. 

Edward Sheldon has positions in JP Morgan.