The Federal Reserve is expected to begin cutting interest rates this year, but concerns about higher deposit costs, slower credit growth, higher funding costs, declining asset quality and the potential for CRE loan defaults remain cloud the outlook for the US banking sector. So let's analyze whether one should buy, hold or sell JPMorgan Chase ( JPM ) and Wells Fargo & Company ( WFC ) bank stocks….
The US banking industry has faced several challenges over the past year, but several large banks were able to post improved profits driven by higher net interest income. However, the Federal Reserve is expected to begin cutting interest rates sometime this year.
Additionally, a sluggish economy, deteriorating asset quality, higher deposit costs and the likelihood of commercial real estate (CRE) loan defaults could put pressure on the US banking system. Amidst this uncertain backdrop, investors can wait for a better entry point into JPMorgan Chase & Co.JPM) and Wells Fargo & Company (WFC).
Before we dive deeper into the fundamentals of these stocks, let's understand what is shaping the outlook for the banking industry.
After the collapse of three regional banks last year, the US banking industry was subjected to several challenges, including credit rating downgrades, deposit outflows, higher deposit costs and tighter lending standards. However, the industry found its footing as banks benefited from higher interest rates, resulting in higher net interest income.
Many analysts are of the opinion that 2024 will turn out to be a weak year when it comes to net interest margins due to higher funding costs. The main risks facing US banks are declining deposits, funding cost pressures, unrealized loan losses, default risk on commercial real estate (CRE) loans and general economic uncertainty.
S&P Global believes that U.S. bank profitability will weaken with expenses rising moderately and revenues little changed, and predicts that provisions in 2024 will not change materially from 2023 levels. S&P believes that the industry's return from common equity will come between 10% and, from 12% and 13% estimated last year.
He also believes credit quality will remain healthy, but delinquencies and delinquencies will continue to rise toward historical averages. Net interest income is likely to fall as funding costs are expected to rise gradually in the first half of 2024 and asset yields are likely to fall as the Fed begins to cut rates.
However, fee income from bank loans and investment banking is expected to increase when rates are lowered, and trading income is also likely to remain relatively strong.
With this background in mind, let's take a look at the basics of both Money center banks stocks, starting with the one listed below in our proprietary rating system.
Stock #2: JPMorgan Chase & Co. (JPM)
JPM operates as a worldwide financial services company. It operates in four segments: Consumer and Community Bank (CCB); Corporate and Investment Bank (CIB); Commercial Bank (BK); and Asset and Wealth Management (AWM).
In terms of trailing 12-month GAAP PEG, 0.33xe JPM is 11.7% lower than the industry average of 0.38x. However, in terms of forward price/sales, the stock's 3.31x is 33.7% higher than the industry average of 2.48x. Its forward price/book of 1.62x is 58.1% higher than the industry average of 1.02x.
JPM's net income for the fourth quarter ended December 31, 2023, fell 15.5% year over year to $9.31 billion. Additionally, its EPS came in at $3.04, representing a 14.8% year-over-year decline. 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 income rose 11.7% year-over-year to $38.57 billion. Its net interest income rose 19.1% over the year-ago quarter to $24.05 billion. Its CET1 ratio was 15%, compared to 13.2% in the year-ago quarter.
Analysts expect JPM's EPS and revenue for the quarter ending March 31, 2024, to grow 3.2% and 8.8% year-over-year to $4.23 billion and $41.71 billion, respectively. Additionally, the company has exceeded EPS consensus 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.
JPMs POWR Ratings are consistent with this mixed view. The stock has an overall rating of C, which translates to Neutral in our proprietary rating system. POWR ratings are calculated by considering 118 different factors, with each factor weighted on an optimal scale.
JPM ranks second out of 10 shares in Money center banks industry. The stock has a grade of C for moment, feel and quality.
Click here to see JPM's Growth, Value and Stability ratings.
Stock #1: Wells Fargo & Company (WFC)
WFC, a diversified financial services company, provides banking, investment, mortgage and consumer and commercial financial products and services in the United States and internationally. It operates in four segments: Consumer Banking and Lending; Commercial Banking; Corporate and Investment Bank; and Wealth and Investment Management.
In terms of non-GAAP forward PEG, WFC's 0.82x is 37.6% lower than the industry average of 1.31x. But in terms of forward price/sales, the stock's 2.48x is 0.1% higher than the industry average of 2.48x. Also, its forward price/book of 1.12x is 9.7% higher than the industry average of 1.02x.
For the fourth quarter ended December 31, 2023, WFC's total revenue rose 2.2% year over year to $20.48 billion. Its net income applicable to common shares 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 reached 7.6%, compared to 7.1% in the year-ago quarter. Furthermore, its CET1 ratio reached 11.4% compared to 10.6% in the year-ago period.
However, the company's provision for loan losses rose 34% year over year to $1.28 billion. Also, its net interest income fell 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 decline 10.7% and 3% year-over-year to $1.10 billion and $20.11 billion, respectively. Additionally, the company has topped consensus EPS estimates in each of the trailing four quarters, which is impressive.
Shares of WFC have risen 34.8% over the past nine months to close the last trading session at $55.59.
WFC's mixed outlook is 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 is rated C for Growth, Value, Momentum, Stability, Sentiment and Quality. It ranks first in the same industry. To view all WFC ratings, Click here.
What should be done next?
43-year investment veteran Steve Reitmeister has just released his market outlook for 2024, along with his trading plan and 11 top picks for the year ahead.
Shares of JPM were flat in premarket trading on Friday. Year-to-date, JPM has gained 10.06%, versus a 6.89% gain in the benchmark S&P 500 over the same period.
About the Author: Dipanjan Banchur
Since he was in high school, Dipanjani was interested in the scholarship. This led him to obtain a master's degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a keen interest in reading and analyzing emerging trends in financial markets.
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