Wall Street has not been kind to most financial stocks so far in 2022. Despite the potential for bank earnings to increase due to rising interest rates, worries over a global recession have weighed on many bank shares. Today we will examine three undervalued bank stocks that provide investors with good buying opportunities.

The banking sector, in general, has performed poorly throughout the year. For instance, the Invesco KBW Bank ETF (NASDAQ:KBWB), which tracks the KBW Nasdaq Bank Index, is down more than 27% in 2022, worse than the S&P 500’s decline of 23%.

Although rising interest rates create a series of disruptions for the economy, they often tend to favor banking stocks. Higher interest rates enable banks to generate better returns on their idle cash, increasing their profitability and improving their growth .

According to the Federal Deposit Insurance Corporation (FDIC), U.S. banks’ profits rose 7.8% year-over-year to $64.4 billion in Q2, “as the growth in net interest income exceeded growth in provision expense.” Therefore, we can expect many bank stocks to create value for shareholders in the quarters ahead.

Here are three undervalued bank stocks that deserve a spot in diversified investment portfolios.

Citigroup (C)

By the value of total assets, Citigroup (NYSE:C) is the third-largest bank in the U.S. Its 2021 revenues totaled nearly $72 billion, and around 73% of C stock is held by institutions.

Citi’s Q2 revenue came in at $19.6 billion, compared with $17.8 billion for the same quarter a year earlier. However, its net income dropped 27% year-over-year. Higher credit costs and restructuring  expenses weighed on Citi’s bottom line.

Citigroup currently derives most of its revenues from depositary banking and trading services. Yet CEO Jane Fraser is focused on moving Citigroup toward a more services-oriented approach. As a result, the financial giant will be easier to run, increasing its profitability. In fact, investors were pleased to see that, in Q2, the sales of the company’s services segment increased 28% YOY.

Ci stock is down roughly 30% in 2022, and its impressive dividend yield of about 4.8% is unlikely to be cut thanks to its robust operating cash flow. The shares’ valuation is attractive because they are trading at 6.39 times Citi’s sales and 0.49 times its book value.

Meanwhile, analysts’ 12-month median price forecast for C stock stands at $57.68.

Discover Financial Services (DFS)

Digital banking and payment services company Discover Financial Services (NYSE:DFS) is well-known for its Discover credit cards. The company owns the Pulse and Diners Club card brands as well, and it also offers banking services. Around 86% of DFS stock is held by institutions.

In Q2, its total revenue net of interest expense fell 10% YOY to $3.2 billion, while its earnings per share came in at $3.96, down from $5.55 in the same quarter last year.

Discover Financial recently announced that it is hiring an additional 2,000 customer care representatives to handle its expanding customer base.

DFS stock is down about 20% in 2022, and it has  a dividend yield of 2.56%. The valuation of the shares, which are changing hands for 6.30 times the company’s forward earnings and 2.04 times its book value, is attractive.

Wall Street’s 12 month median price forecast for the stock is $120.50, well above its current level of $93. 

Goldman Sachs (GS)

Our final undervalued bank stock is Goldman Sachs (NYSE:GS). The financial giant has a
wide range of corporate and individual clients worldwide. Over 70% of GS stock is held by institutions. And , in terms of total assets, it is one of  the top ten largest financial institutions in the U.S.

Its net revenue fell 23% YOY to $11.86 billion, while its EPS fell to $7.73, compared with $15.02 in the second quarter of 2021.

Despite the challenging macroeconomic environment, Goldman has affirmed its top priority is to return money to its shareholders.  Given its top-notch track record when it comes to risk management and capital allocation, Wall Street is likely to give Goldman the benefit of the doubt.

Management has also announced that Goldman Sachs will start offering Transaction Banking (TxB) in the European Union. The unit will provide the bank’s European clients with a variety of new services, including deposits and payments. The bank is also looking at carrying out layoffs.

GS stock is down 22% in 2022, but it currently has a dividend yield of 3.3%. The shares, changing hands for  7.87 times forward earnings and 1 time book value, are undervalued.

Wall Street’s 12-month median price forecast for GS stands at $376.50.

On the date of publication, Tezcan Gecgil, Ph.D., did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.