On the heels of third-quarter earnings releases, which showed substantial margin expansion, U.S. bank stocks outperformed the broader equity market.

The S&P U.S. BMI Banks index had a total return of 12.8% in October, beating the S&P 500's 8.1% return. The 209 banks in the S&P Global Market Intelligence analysis had a median monthly return of 12.3%. Thirty-three of those banks had a return of at least 20.0%, while just 24 companies had a negative return.

S&P Global Market Intelligence analyzes U.S. banks trading on the Nasdaq, NYSE or NYSEAM with total assets of greater than $3 billion in the most recent quarter available. Excludes banks in the mutual holding company ownership structure, other operating subsidiaries, and mutual bank conversions until financial data is available for the quarter following the conversion date. Adjusted tangible book value is calculated as the sum of tangible common equity and loss reserves less nonperforming assets and loans 90 or more days past due but still accruing interest divided by common shares outstanding.

Market performance of single-family lenders

For myriad reasons, including lower margins and longer-duration assets, banks that specialize in single-family mortgage lending tend to trade at a discount to more diversified lenders. Two examples are Topeka, Kan.-based Capitol Federal Financial Inc. and Glenville, N.Y.-based TrustCo Bank Corp NY. More than 85% of their loan portfolios are comprised of one- to four-family residential loans, according to regulatory data as of June 30.

Both Capitol Federal and TrustCo have consistently traded well below the industry median in terms of price-to-adjusted tangible book value during the past 12 months. Capitol Federal had fetched a higher valuation relative to TrustCo from October 2021 through September. But last month, the companies traded places, with TrustCo surging to a one-year valuation high and Capitol Federal stuck near its low for the year.

Entries and exits

The three entries to the bottom-20 valuation list in October were Capitol Federal and two banks based in Dallas, First Foundation Inc. and Texas Capital Bancshares Inc. In contrast to most companies in the analysis, Capitol Federal and First Foundation experienced margin contraction in the third quarter. On the other hand, Texas Capital's margin improved to 3.07% from 2.68% quarter over quarter.

The exits were TrustCo; Martinsville, Va.-based Carter Bankshares Inc.; and Woodbridge, N.J.-based Northfield Bancorp Inc.

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Bottom-20 valuation banks

For the 11th consecutive month, Citigroup Inc. was the lowest-valued bank in the analysis by P/ATBV. Its valuation at the end of October was 53.6%, up about 5 percentage points from Sept. 30. Weaker noninterest income and higher noninterest expense more than offset the benefits of margin expansion, resulting in pre-provision EPS declining to $1.96 from $2.28 a year ago.

First Internet Bancorp was the second bank by lowest valuation with a P/ATBV of 62.4%. It was one of the three banks in the analysis, along with SVB Financial Group and Silvergate Capital Corp., that traded down more than 20% in October. Earnings were down quarter over quarter at First Internet, owing largely to margin pressure.