Cooler-than-expected jobs data has bolstered belief amongst traders and analysts that the Fed’s hiking cycle may be complete, and the central bank could start cutting rates sooner than expected. This could ease concerns over deposit costs, loan growth, and credit quality for the banking industry.
However, the risks of further rate hikes remain as the Fed has left the door open for further action as officials work to bring inflation under 2%. Amid this uncertainty, waiting for better entry points in JPMorgan Chase & Co. (JPM) and Wells Fargo & Company (WFC) could be wise.
Before diving deeper into the fundamentals of these stocks, let’s take a closer look at what’s taking place in the U.S. banking sector.
The U.S. banking sector has been under pressure this year due to regional bank failures, heightened capital requirements, slowing loan growth, a rise in unrealized bond losses, credit rating downgrades, the risk of default arising out of commercial real estate (CRE) loans, and the overall deterioration of the macroeconomic environment.
Delinquent commercial real estate loans at U.S. banks have hit their highest level in a decade due to the rise of remote working, high-interest rates, and an uncertain economy. The volume of past-due loans on properties rented to others having missed more than one payment has risen 30% to $17.70 billion in the three months ended September. Moreover, credit card debt rose to a record high during the third quarter.
However, the lower-than-expected rise in nonfarm payrolls has boosted the belief that the Fed could stop raising interest rates. According to the CME FedWatch Tool, 85.4% of traders are betting on the Fed keeping rates steady at its December policy meeting.
The Fed left interest rates unchanged for the second time in a row following 11 consecutive rate hikes since March 2022, including four this year. The Fed has held the benchmark interest rates steady between 5.25% and 5.5% since July. Despite signs of the Fed achieving a soft landing, central bank officials insist that the incoming macroeconomic data could shape their policy decisions.
Many central bankers have said that additional rate increases could be in the offing. Minneapolis Fed President Neel Kashkari believes the central bank likely has more work ahead to control inflation. While high-interest rates have boosted the net interest income of U.S. banks, if the rates remain high, loan growth could take a serious hit as borrowing becomes expensive, and the deposit costs for banks will also rise.
Additionally, further rating downgrades arising from concerns over the high-interest rate environment could exacerbate the U.S. banking sector’s operating environment, leading to a further escalation in 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 from the investment point of view.
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 forward non-GAAP P/E, JPM’s 8.68x is 2% lower than the 8.86x industry average. Its 0.21x trailing-12-month GAAP PEG is 44.6% lower than the 0.37x industry average.
On the other hand, in terms of forward Price/Sales, JPM’s 2.61x is 19.2% higher than the 2.19x industry average. Its 1.41x forward Price/Book is 41.2% higher than the 1x industry average.
JPM’s total net revenue - reported for the third quarter ended September 30, 2023, increased 21.9% year-over-year to $39.87 billion. Its net income rose 35.1% year-over-year to $13.15 billion. In addition, its EPS came in at $4.33, representing an increase of 38.8% year-over-year. Its return on common equity (ROE) was 18%, compared to 15% in the year-ago period. Also, its CET1 ratio was 14.3%, compared to 12.5% in the prior-year quarter.
Analysts expect JPM’s EPS and revenue for the quarter ending December 31, 2023, to increase 3.7% and 14.6% year-over-year to $3.70 and $39.59 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 11.2% to close the last trading session at $144.29.
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. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It is ranked #2 out of 10 stocks in the Money Center Banks industry. It has a C grade for Growth, Value, Momentum, Stability, and Quality. Click here to see the JPM’s rating for Sentiment.
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 P/E, WFC’s 7.94x is 10.3% lower than the 8.86x industry average. Its 0.56x forward non-GAAP PEG is 53.2% lower than the 1.20x industry average.
On the other hand, in terms of trailing-12-month GAAP PEG, WFC’s 0.54x is 43.1% higher than the 0.37x industry average.
WFC’s total revenue for the third quarter ended September 30, 2023, increased 6.6% year-over-year to $20.86 billion. Its net income rose 60.6% year-over-year to $5.77 billion. Its EPS came in at $1.48, representing an increase of 72.1% year-over-year.
Its ROE came in at 13.3%, compared to 8.1% in the prior-year quarter. Also, its net interest income rose 8.3% year-over-year to $13.11 billion. In addition, its CET1 ratio came in at 11% compared to 10.3% in the year-ago period.
For the quarter ending December 31, 2023, WFC’s revenue is expected to increase 3.6% year-over-year to $20.37 billion. Its EPS for the same quarter is expected to decline 15.7% year-over-year to $1.23. It surpassed the consensus EPS estimates in each of the trailing four quarters. The stock has gained 4.8% but fell 12.1% over the past year to close the last trading session at $40.40.
WFC’s bleak prospects are reflected in its POWR Ratings. It has an overall rating of C, which translates to Neutral in our proprietary rating system.
It has a C grade for Growth, Momentum, Stability, Sentiment, and Quality. It is ranked first in the same industry. To see WFC’s rating for Value, 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 fell $0.05 (-0.03%) in premarket trading Friday. Year-to-date, JPM has gained 10.81%, versus a 14.70% 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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