Top Financial Stocks for May 2023

Waterdrop Inc. (WDH), UniCredit SpA (UNCRY), and First Citizens BancShares Inc. (FCNCA) lead financials stocks in one-year trailing total returns in May, climbing by as much as 168% while the broader financials sector has fallen.

Financials stocks were rocked in March by the sudden collapse of Signature Bank and Silicon Valley Bank, the latter being the largest U.S. bank failure since 2008. The Financial Select Sector SPDR ETF (XLF)—a benchmark for the sector—fell almost 12% between March 8, the day SVB announced a $1.8 billion loss on bond investments, and March 17, the day SVB's parent company filed for bankruptcy. The index has since stabilized, but it remains down 4% over the past 12 months, compared with the Russell 1000 Index's gains of almost 3%.

Here are the top three financial stocks each with the best value, the fastest growth, and the most momentum. Benchmark data above is as of May 16, while all other figures below are as of May 11, 2023.

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 that you’re paying less for each dollar of profit generated.

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• Jackson Financial Inc.: A financial holding company offering annuities to retail investors across the U.S. Its subsidiaries include Jackson National Life Insurance Co., Jackson National Life Insurance Co. of New York, and PPM America. Shares of Jackson Financial are up about 3% in the last year, although the company missed revenue and earnings per share (EPS) expectations in the most recent quarter.
• Aimia Inc.: A Canadian investment holding company that makes long-term investments in both public and private companies. It also operates an investment advisory business. The company has shed nearly 20% of its value over the last year amid an April 2023 ousting of its board chairman and pushback from shareholders over voting transparency.
• Ambac Financial Group Inc.: Ambac is a financial services holding company that operates a specialty property & casualty insurance distribution and underwriting platform. Ambac swung to a net loss for the most recent quarter as the company said it is working with its U.S. regulator on a "revised operating and capital framework."

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.

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• New York Community Bancorp Inc.: This is the parent of Flagstar Bank, a regional bank in the Northeast and Midwest U.S. The company reported substantial EPS growth in the latest quarter, due primarily to its acquisition of assets from Signature Bank following its collapse earlier this year. Still, New York Community Bancorp noted solid earnings growth even without the acquisition.
• UniCredit: An Italian international banking group that offers mortgages, life insurance, consumer credit, investment banking, asset management, and related services around the world. UniCredit reported its best-ever first quarter for 2023, with growth driven by momentum in all of its business lines.
• MidCap Financial Investment Corp.: A closed-end, non-diversified management investment company. It invests in middle-market companies through mezzanine and senior secured loans primarily. The company attributed growth in the latest quarter to higher base rates, strong fee and prepayment income, and a new fee structure.

Financial Stocks With the Most Momentum

These are the financial stocks that had the highest total return over the past 12 months.

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• Waterdrop: A Chinese insurance technology platform offering a variety of healthcare and insurance products online. Waterdrop shares surged late in 2022 amid news of its launch of insurance against breast cancer recurrence, among other developments.
• UniCredit: See company description above.
• First Citizens BancShares: First Citizens BancShares is the holding company of First-Citizens Bank & Trust Co., a personal and commercial bank with more than $200 billion in assets. In March 2023, First Citizens acquired a substantial portion of Silicon Valley Bank after the latter collapsed.

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 (NIM) 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 couped-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.

Advantages of Financial Stocks

Two key advantages of financial stocks are regulation and exposure to investment banking.

Regulation: After the 2007-2008 global financial crisis, lawmakers passed the Dodd-Frank Wall Street Reform and Consumer Protection Act to overhaul the U.S. financial system. Banks must now maintain certain capital levels, while large banks must undergo an annual “stress test” to determine their ability to survive adverse downturns. These heightened regulations substantially lower the risk of investing in the financial sector. Still, the early-2023 collapse of two banks—Signature Bank and Silicon Valley Bank—is a reminder that regulation doesn't guarantee of the success of financial companies.

Investment banking: Investing in financial institutions that offer investment banking provides broad exposure to services that may outperform traditional lending during different stages of the economic cycle.