Here’s your best bank-stock bet for 2015

It’s been a relatively good year for large-cap bank stocks, especially when you consider the bad news for the industry, including the massive fraud suffered by Citigroup’s subsidiary in Mexico and the flow of massive settlements with regulators for all sorts of sins, most recently for foreign-exchange manipulation.

But one large-cap U.S. bank stands out for its combination of strong performance and a low valuation to forward earnings estimates, and avoidance of regulatory pain.

That bank is Discover Financial Services DFS, -0.12% When looking at the 21 biggest U.S. banks with total assets of more than $80 billion, Discover has had the second-best annualized return on common equity during the first three quarters of 2014:

The only large-cap U.S. bank to perform better than Discover during the first three quarters of 2014 was American Express Co. AXP, -0.02% with a return on common equity of 28.4%, beating Discover’s 23.52%.

In April, I said Discover was the best bank stock to buy because it was trading so cheaply to earnings estimates, while management was purchasing loads of shares.

Discover hasn’t been the best performer among large-cap banks this year, but its total return — with dividends reinvested — of 20% compares with 5% for American Express. One reason for this could be a faster growth rate, with Discover’s total loan receivables growing 2% year-over-year, while American Express’ loan portfolio declined by 1%.

Discover’s stock buybacks continue to boost earnings per share. The company’s average common share count in the third quarter was down 5% from a year earlier, while American Express lowered its share count by 3%.

Discover’s shares closed at $66.27 Friday and traded for 12 times the consensus 2016 earnings estimate of $5.51 a share, among analysts polled by FactSet. That compares to a forward price-to-earnings ratio of 15.6% for American Express. It’s also cheaper than most of the 21 banks listed here.

This table shows forward price-to-earnings ratios based on 2016 consensus estimates for the same group of 21 large U.S. banks, along with year-to-date total returns:

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