The U.S. banking industry continues to face challenges such as higher deposit costs, the risk of a potential default on commercial real estate (CRE) loans, and rating downgrades by top rating agencies.

Given the challenges plaguing the U.S. banking sector, waiting for a better entry point in JPMorgan Chase & Co. (JPM) could be wise. However, given its fundamental weakness, U.S. Bancorp (USB) is best avoided now.

When the banking sector was recovering from the crisis caused by the failure of the three regional banks earlier this year, major credit rating agencies recently downgraded several banks due to worries over the stability of the U.S. banking sector. Moody’s downgraded 10 small and mid-sized banks and placed six banking giants, including USB, on review for potential rating downgrades.

Previously, Fitch downgraded the entire U.S. banking sector and has recently warned of potential rating downgrade for America’s biggest banks. S&P Global has recently downgraded five U.S. banks while putting two others on notice. The downgrades have raised concerns over the sector’s health.

The rating downgrades were triggered by the benchmark interest rates that reached the highest level in 22 years. Although the Fed held interest rates steady in its last meeting, it signaled another rate hike later this year to bring inflation to its 2% target.

The implications of a rating downgrade include higher borrowing costs for the impacted banks, stricter capital requirements, and a rise in risk perception related to the downgraded bank’s operations.

With interest rates unlikely to be cut soon, loan growth could remain under pressure as borrowing becomes expensive. Moreover, the deposit costs for banks are also expected to rise.

Further rating downgrades could also deteriorate the U.S. banking sector’s operating environment, leading to higher borrowing costs and even stricter lending standards.

Considering these factors, let’s take a look at the fundamentals of the two Money Center Banks stocks, starting with number 2.

Stock #2: U.S. Bancorp (USB)

USB is a financial service holding company that provides various financial services to individuals, businesses, institutional organizations, government entities, and other financial institutions. It operates in Corporate and Commercial Banking, Consumer and Business Banking, Wealth Management and Investment Services, Payment Services, and Treasury and Corporate Support segments.

For the fiscal second quarter that ended June 30, 2023, net income applicable to USB declined 11.1% year-over-year to $1.36 billion. Its EPS came in at $0.84, representing a decline of 15.2% year-over-year. The company’s return on average assets came in at 0.81%, compared to 1.06% in the year-ago quarter. Also, its return on tangible common equity came in at 17.1%, compared to 18.6% in the prior year quarter.

Analysts expect USB’s EPS for the quarter ending September 30, 2023, to decline 10.3% year-over-year to $1.04. It failed to surpass the consensus EPS estimates in three of the trailing four quarters. The stock has declined 24.2% year-to-date to close the last trading session at $33.06.

USB’s poor prospects are reflected in its POWR Ratings. The stock has an overall D rating, equating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

It is ranked #8 out of 10 stocks in the Money Center Banks industry. It has a D grade for Growth and Sentiment. Click here to see the other ratings of USB for Value, Momentum, Stability, and Quality.

Stock #1: JPMorgan Chase & Co. (JPM)

JPM operates as a financial services company worldwide. It operates through four segments: Consumer & Community Banking (CCB), Corporate & Investment Bank (CIB), Commercial Banking (CB), and Asset & Wealth Management (AWM).

In terms of the trailing-12-month net income margin, JPM’s 35.38% is 37.2% higher than the 25.78% industry average. Likewise, its 17.11% trailing-12-month Return on Common Equity is 50.5% higher than the industry average of 11.37%. Furthermore, the stock’s 1.24% trailing-12-month Return on Total Assets is 7.8% higher than the industry average of 1.15%.

JPM’s total net revenue - reported for the second quarter ended June 30, 2023, increased 34.5% year-over-year to $41.31 billion. Its net income rose 67.3% year-over-year to $14.47 billion. In addition, its EPS came in at $4.75, representing an increase of 72.1% year-over-year. Its return on common equity (ROE) was 20%, compared to 13% in the year-ago period. Also, its CET1 ratio was 13.8%, compared to 12.2% in the prior-year quarter.

Analysts expect JPM’s EPS and revenue for the quarter ending September 30, 2023, to increase 22.5% and 20.7% year-over-year to $3.85 and $39.48 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 36.6% to close the last trading session at $145.02.

JPM’s POWR Ratings are consistent with this uncertain outlook. It has an overall rating of C, translating to Neutral in our proprietary rating system.

It has a B grade for Sentiment and a C for Growth, Momentum, Stability, and Quality. It is ranked #3 in the same industry. To see JPM’s rating for Value and Sentiment, click here.

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JPM shares were trading at $144.94 per share on Monday morning, down $0.08 (-0.06%). Year-to-date, JPM has gained 10.49%, versus a 13.11% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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