The U.S. banking industry has faced several challenges over the past year, but several big banks were able to post improved profitability driven by higher net interest incomes. However, the Federal Reserve is expected to start cutting interest rates sometime this year.
Moreover, a sluggish economy, deterioration of asset quality, higher deposit costs, and the likelihood of default on commercial real estate (CRE) loans could put pressure on the U.S. banking system. Amid this uncertain backdrop, investors could wait for a better entry point in JPMorgan Chase & Co. (JPM) and Wells Fargo & Company (WFC).
Before diving deeper into the fundamentals of these stocks, let’s understand what’s shaping the banking industry’s prospects.
Following the collapse of three regional banks last year, the U.S. banking industry was subject to several challenges, including credit rating downgrades, deposit outflows, higher deposit costs, and stringent lending standards. However, the industry found its footing as banks benefitted from the higher interest rates, resulting in higher net interest income.
Many analysts are of the view that 2024 will turn out to be a weak year when it comes to net interest margins due to higher funding costs. The key risks that U.S. banks are facing are declines in deposits, funding cost pressures, unrealized loan losses, risk of default on commercial real estate (CRE) loans, and overall economic uncertainty.
S&P Global believes the profitability of U.S. banks will weaken with expenses rising moderately and revenues changing marginally, and it forecasts provisions in 2024 won’t change materially from 2023 levels. S&P believes the industry’s return on common equity will come between 10% and, down from the estimated 12% and 13% last year.
It also believes the credit quality will remain in good shape, but delinquencies and charge-offs will continue rising toward historical averages. Net interest income will likely fall as funding costs are expected to increase incrementally in the first half of 2024, and asset yields are likely to decline when the Fed starts cutting rates.
However, fee incomes from mortgage and investment banking are expected to rise when rates are cut, and trading revenues are also likely to remain relatively robust.
Considering this backdrop, let's take a look at the fundamentals of the two Money Center Banks stocks, starting with the one ranked lower in our proprietary rating system.
Stock #2: 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 trailing-12-month GAAP PEG, JPM’s 0.33x is 11.7% lower than the 0.38x industry average. However, in terms of forward Price/Sales, the stock’s 3.31x is 33.7% higher than the 2.48x industry average. Its 1.62x forward Price/Book is 58.1% higher than the 1.02x industry average.
JPM’s net income for the fourth quarter ended December 31, 2023, declined 15.5% year-over-year to $9.31 billion. In addition, its EPS came in at $3.04, representing a decrease of 14.8% year-over-year. Its return on common equity (ROE) was 12%, compared to 16% in the year-ago quarter.
On the other hand, the company’s total net revenue increased 11.7% year-over-year to $38.57 billion. Its net interest income rose 19.1% over the prior-year quarter to $24.05 billion. Its CET1 ratio was 15%, compared to 13.2% in the previous year’s quarter.
Analysts expect JPM’s EPS and revenue for the quarter ending March 31, 2024, to increase 3.2% and 8.8% year-over-year to $4.23 and $41.71 billion, respectively. Moreover, the company has surpassed the consensus EPS estimates in three of the trailing four quarters.
Over the past nine months, the stock has gained 35.9% to close the last trading session at $186.06.
JPM’s POWR Ratings are consistent with this mixed outlook. The stock has an overall rating of C, translating to Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
JPM is ranked #2 out of 10 stocks in the Money Center Banks industry. The stock has a C grade for Momentum, Sentiment, and Quality.
Click here to see JPM’s ratings for Growth, Value, and Stability.
Stock #1: Wells Fargo & Company (WFC)
WFC, a diversified financial services company, provides banking, investment, mortgage, and consumer and commercial finance products and services in the United States and internationally. It operates through four segments: Consumer Banking and Lending; Commercial Banking; Corporate and Investment Banking; and Wealth and Investment Management.
In terms of forward non-GAAP PEG, WFC’s 0.82x is 37.6% lower than the 1.31x industry average. But in terms of forward Price/Sales, the stock’s 2.48x is 0.1% higher than the 2.48x industry average. Also, its 1.12x forward Price/Book is 9.7% higher than the 1.02x industry average.
For the fourth quarter ended December 31, 2023, WFC’s total revenue increased 2.2% year-over-year to $20.48 billion. Its net income applicable to common stock rose 9.8% year-over-year to $3.16 billion. Its EPS came in at $0.86, up 14.7% year-over-year. Its ROE came in at 7.6%, compared to 7.1% in the prior-year quarter. In addition, its CET1 ratio came in at 11.4% compared to 10.6% in the year-ago period.
However, the company’s provision for credit losses rose 34% year-over-year to $1.28 billion. Also, its net interest income declined 4.9% year-over-year to $12.77 billion.
For the first quarter ending March 31, 2024, WFC’s revenue and EPS are expected to decrease 10.7% and 3% year-over-year to $1.10 and $20.11 billion, respectively. Furthermore, the company has topped the consensus EPS estimates in each of the trailing four quarters, which is impressive.
Shares of WFC have surged 34.8% over the past nine months to close the last trading session at $55.59.
WFC’s mixed prospects are reflected in its POWR Ratings. The stock has an overall rating of C, which translates to a Neutral in our proprietary rating system.
The stock has a C grade for Growth, Value, Momentum, Stability, Sentiment, and Quality. It is ranked first in the same industry. To see all the ratings of WFC, click here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
JPM shares were unchanged in premarket trading Friday. Year-to-date, JPM has gained 10.06%, versus a 6.89% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
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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