Chicago, IL – November 15, 2023 – Today, Zacks Equity Research discusses JPMorgan Chase & Co. JPM, Wells Fargo & Co. WFC and Fifth Third Bancorp FITB.
Link: https://www.zacks.com/commentary/2183780/3-major-regional-banks-to-buy-on-high-rates-economic-growth
The Zacks Major Regional Banks will benefit from higher rates as net interest income (NII) continues to rise, despite increasing funding costs and weakening loan demand putting a strain on net interest margin (NIM) expansion. Solid economic growth will also support banks' financials in the near term.
Business restructuring/expansion initiatives and digitization will offer much-needed support. Currently, banks' asset quality remains within manageable levels. Hence, major banks like JPMorgan Chase & Co., Wells Fargo & Co. and Fifth Third Bancorp are worth betting on.
The Zacks Major Regional Banks industry includes the nation's largest banks in terms of assets, with most operating globally. The financial performance of these banks largely depends on the nation's economic health. As the banks are involved in several complex financial activities, they are required to meet the stringent regulations set by the Federal Reserve and other agencies.
Apart from traditional banking services, which are the source of the net interest income (NII), major regional banks provide a wide array of other financial services and products to retail, corporate and institutional clients, both domestic and global. These include credit and debit cards, mortgage banking, wealth management and investment banking, among others. Therefore, a large revenue source for these banks is fees and commissions earned from these services.
High-Interest Rates: The Fed's aggressive monetary policy since March 2022 has led the rates to touch a 22-year high of 5.25-5.5% as it continues to fight 'sticky' inflation. With the inflation gradually cooling down, market participants expect the central bank not to raise the rates any further.
Higher interest rates are a boon for major regional banks and they reaped huge benefits in the form of higher NIM and NII last year. While the faster pace of rate hikes has put pressure on banks' NIM this year because of an increase in funding costs, solid economic growth on the back of resilient consumers and decent deposit inflows keep on supporting banks' NII.
Business Restructuring Initiatives: Major regional banks are taking several strategic actions to expand into new avenues and lower their dependence on spread income. The restructuring of operations is essential for technological advancement and further domestic/global expansion to continue improving profitability. Banks are investing heavily in artificial intelligence and other digital platforms and even partnering/acquiring providers of such services.
The demand for these witnessed a substantial rise amid the COVID-19 pandemic. Banks are also aggressively expanding their footprint outside the United States and into Europe and China. Banks are re-evaluating their business structure to simplify operations and do away with unprofitable ones.
Asset Quality Metrics Touch Pre-Pandemic Level: For most of 2020, major regional banks built extra provisions to tide over unexpected defaults and payment delays due to the economic downturn resulting from the COVID-19 mayhem. This considerably hurt their financials. But with solid economic growth and support from government stimulus packages, banks began to release these reserves back into the income statement.
Now, given the current macroeconomic headwinds, industry players are building provisions to counter any adverse fallout. While conservative lending policy and the resilience of borrowers will help keep banks' asset quality manageable, several credit quality metrics are slowly creeping up toward pre-pandemic levels.
Waning Loan Demand: The Fed's aggressive monetary policy has lowered the demand for loans on fears of an economic downturn. Though the Fed's latest Summary of Economic Projections indicates that the U.S. economy will grow at the rate of 2.1% this year, economic growth is likely to slow down in 2024. Also, higher interest rates are keeping the borrowers on the sidelines. Hence, the lending backdrop continues to be muted as the demand for loans continues to decline.
The Zacks Major Regional Banks industry is a 15-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #72, which places it in the top 29% of more than 245 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry's positioning in the top 50% of the Zacks-ranked industries is a result of an encouraging earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group's earnings growth potential. Since the end of the first quarter of 2023, the industry's earnings estimates for the current year have been revised 6.2% upward.
Before we present a few major bank stocks that are worth considering, let's take a look at the industry's recent stock market performance and valuation picture.
The Zacks Major Regional Banks industry has widely underperformed both the S&P 500 composite and its sector over the past two years. While stocks in this industry have collectively declined 29.8% over the period, the Zacks S&P 500 composite has declined just 6.8%, and the Zacks Finance sector has fallen 12.6%.
One might get a good sense of the industry's relative valuation by looking at its price-to-tangible book ratio (P/TBV), which is commonly used for valuing banks because of large variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/TBV of 1.56X. This compares with the highest level of 2.48X, the lowest of 1.21X and the median of 1.98X over the past five years. The industry is trading at a huge discount compared with the market at large, as the trailing 12-month P/TBV for the S&P 500 composite is 9.60X.
As finance stocks typically have a lower P/TBV ratio, comparing major regional banks with the S&P 500 may not make sense to many investors. However, a comparison of the group's P/TBV ratio with that of the broader sector ensures that the group is trading at a solid discount. The Zacks Finance sector's trailing 12-month P/TBV came in at 3.90X. This is way above the Zacks Major Regional Banks industry's ratio.
JPMorgan: The largest U.S. bank (in terms of assets), JPMorgan has operations in more than 60 countries. The company is expected to keep benefiting from higher rates (funding costs to put strain), loan growth, strategic buyouts, business diversification efforts, a strong liquidity position and initiatives to expand the branch network in new markets.
In May, JPM took over the failed First Republic Bank for $10.6 billion after almost two months of joint efforts with other lenders to save the flagging institution. The deal, which added deposits of almost $92 billion, nearly $173 billion of loans and $30 billion of securities to the banking behemoth's balance sheet, continues to be accretive to the top and the bottom line. The company expects NII to be $88.5 billion this year, up from the prior guidance of $87 billion.
This Zacks Rank #1 (Strong Buy) lender has been growing through on-bolt acquisitions, both domestic and international. In August, it announced plans to increase its stake in Brazil's C6 Bank to 46% from 40%. In June, the company formed a strategic alliance with Cleareye.ai, a financial technology firm focused on trade finance, while in May, the company acquired Aumni. These, along with several others, are expected to keep aiding its plan to diversify revenues and expand the fee income product suite and consumer bank digitally. You can see the complete list of today's Zacks #1 Rank stocks here.
Also, JPM is expanding its footprint in new regions and has a presence in 48 of 50 U.S. states. It intends to expand its retail branches further. The strategy continues to help the bank grab cross-selling opportunities by increasing its presence in the card and auto loan sectors. Also, the company launched its digital retail bank Chase in the U.K. in 2021 and plans to expand the reach of its digital bank across the European Union countries.
With a market cap of $423.3 billion, JPMorgan is expected to continue benefiting from its scale and business expansion efforts. Also, analysts are bullish on the stock. The Zacks Consensus Estimate for earnings has moved 4.6% upward for 2023 in the past month. The stock has rallied 7.8% in the past six months.
Wells Fargo: With total assets worth $1.91 trillion as of Sep 30, 2023, Wells Fargo is one of the largest financial holding companies in the United States. The company provides a diverse range of banking and non-banking financial services and products through more than 5,000 branches, a broad ATM network, the Internet and other distribution channels across North America and globally.
Though WFC has been facing problems related to its 2016 sales scandal, management has been striving hard to overcome this matter and lift the asset cap imposed on it by the Fed.
Wells Fargo is focused on reducing its expense base. Expense reduction efforts such as streamlining organizational structure, closing branches and reducing headcount undertaken from third-quarter 2020 have been aiding expense management. The company delivered gross expense savings aggregating $7.5 billion in 2021 and 2022. The company expects to continue with these efficiency initiatives this year.
Wells Fargo continues to build on its deposit base, which witnessed a three-year (ended 2022) CAGR of 1.5%. The metric declined in the first nine months of 2023 on a year-over-year basis, mainly due to customers allocating cash to higher-yielding alternatives. While the pace of deposit growth is likely to continue moderating in the near term, the considerable strength in the consumer business and commercial banking segments will likely support the deposit balance in the upcoming period.
With a market cap of $148.5 billion, Wells Fargo is expected to regain its lost glory with the above-mentioned strategic efforts. Analysts are bullish on the stock. In the past 30 days, the Zacks Consensus Estimate for earnings has been revised 7.3% upward for 2023. The stock, which currently carries Zacks Rank #2, has gained 5.2% over the past six months.
Fifth Third Bancorp: With assets of $213 billion, Cincinnati, HO-based Fifth Third Bancorp has more than 1,070 full-service banking centers across 11 states throughout the Midwestern and Southeastern regions of the United States.
FITB's efforts to expand the non-interest income base over the years with the help of strategic partnerships and acquisitions. It acquired Big Data LLC in May 2023, which adds national healthcare revenue cycle capabilities. In the same month, the company acquired an embedded payment platform, Rize Money. Further, the acquisitions of Dividend Finance in 2022, Provide in 2021 and Coker Capital in 2018 expanded commercial verticals. Fifth Third has also made efforts to enhance its presence in the Southeast and reduce its footprint in the Midwest regions.
The company's deposit balances represent an essential source of funding and revenue growth opportunity. FITB is well-poised to continue its organic growth supported by a strong pipeline, branch expansions, digital initiatives, new commitment growth, contributions from the acquisitions, economic development and improving consumer spending trends.
A strong balance sheet and investment-grade long-term credit ratings from leading credit rating agencies are likely to continue supporting the company's growth. Fifth Third Bancorp's sustainable capital distributions reflect a solid liquidity position.
Shares of FITB, which has a market cap of $17.1 billion, rallied 3.7% over the past six months. The company's earnings estimates for 2023 have moved 3.3% north over the past four weeks.
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