Zacks Industry Outlook Highlights JPMorgan Chase, Bank of America and The Bank of New York Mellon – Yahoo Finance

Written by Amanda

Zacks Industry Outlook Highlights JPMorgan Chase, Bank of America and The Bank of New York Mellon  Yahoo Finance

For Immediate Release

Chicago, IL – March 17, 2023 – Today, Zacks Equity Research discusses JPMorgan Chase & Co. JPM, Bank of America Corp. BAC and The Bank of New York Mellon Corp. BK.

Industry: Regional Banks

Link: https://www.zacks.com/commentary/2066546/3-major-regional-banks-worth-a-look-despite-svb-sbny-collapse

The Zacks Major Regional Banks industry is expected to witness muted NII and NIM performance on the contagion risk arising from the bank runs at two closed banks. Higher interest rates due to the Federal Reserve’s aggressive hikes, which benefit the banks, are turning out to be counter-productive. Worsening asset quality, recessionary risk and a gradual slowdown in loan demand are other key headwinds.

Yet, restructuring/expansion efforts and digitization will offer support. So, JPMorgan Chase & Co., Bank of America Corp. and The Bank of New York Mellon Corp. are worth taking a look.

About the Industry

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.

Key Trends to Watch in the Major Regional Banks Industry

Hawkish Fed & Bank Run Risk: The Fed’s ultra-aggressive monetary policy over the past year led the rates to reach a 15-year high level. The rising interest rates are a boon for major regional banks and they reaped substantial benefits in form of higher NIM and NII in 2022. But faster rate hikes after a prolonged period of low rates have their fall out, as seen in the past week with the collapse of two S&P 500 banks – Silicon Valley Bank and Signature Bank. This shook the confidence of the investors and depositors amid fears of contagion.

The central bank has announced a new expansive emergency lending program – the Bank Term Funding Program (BTFP) – in an effort to limit the contagion risk. Yet, there are chances that other banks with unrealized losses or uninsured depositors could be at risk. In another blow to the U.S. banking sector, Moody’s downgraded its outlook on the entire sector to negative, reflecting the worsening operating backdrop following bank runs at the two collapsed banks.

While the Fed is likely to keep increasing rates in the near term to control inflation, major regional banks are less likely to witness much improvement in NII going forward as funding costs rise. This will also put pressure on NIM in the upcoming period.

Near-Term Recession Risk: The Fed’s aggressive monetary policy has intensified fears of a “mild” recession in the second half of 2023. Even the Fed’s Summary of Economic Projections announced in December 2022 indicates the U.S. economy will slow down considerably this year, with just 0.5% growth. While major regional banks are better equipped to face economic downturn owing to the reforms introduced subsequent to the 2008 financial crisis, the lending scenario is likely to weaken as demand for loans gradually wanes.

Asset Quality Metrics Touching 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 coronavirus mayhem. This considerably hurt their financials. But with solid economic growth and support from the government stimulus packages, banks began to release these reserves back into the income statement.

Yet, given the present macroeconomic and geopolitical headwinds, and rise in loan demand, major regional banks 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.

Business Restructuring Initiatives: Major regional banks are taking several strategic steps to expand into new avenues and lower their dependence on spread income. 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 as the demand for these witnessed a substantial rise amid the COVID-19 pandemic. Major regional banks are also aggressively expanding their footprint outside the United States and into the U.K. and China.

Banks are re-evaluating their business structure to improve operating efficiency. The main goal is to simplify operations and do away with non-core, unprofitable ones.

Zacks Industry Rank Indicates Gloomy Prospects

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 #151, which places it in the bottom 39% 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 bottom 50% of the Zacks-ranked industries is a result of discouraging 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 April 2022-end, the industry’s earnings estimates for the current year have been revised 8.5% lower.

Before we present a few major bank stocks that you may keep an eye on despite deteriorating operating environment on bank run risk and rising interest rates, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry Underperforms Sector and S&P 500

The Zacks Major Regional Banks industry has underperformed both the S&P 500 composite and its own sector over the past two years. While the stocks in this industry have collectively lost 19.4% over the period, the Zacks S&P 500 composite has declined 2.8% and the Zacks Finance sector has fallen 8.5%.

Industry’s Valuation

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 1.70X. This compares with the highest level of 2.53X, lowest of 1.21X, and median of 2.10X 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 9.70X.

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. But 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 4.53X. This is above the Zacks Major Regional Banks industry’s ratio.

3 Major Regional Banks to Watch

JPMorgan: The largest U.S. bank (in terms of assets), JPMorgan has operations in more than 60 countries. The company is expected to benefit from the higher interest rate environment. Given the ultra-hawkish monetary policy stance and decent loan demand, the company is projecting NII (managed basis) to be approximately $73 billion for 2023.

This Zacks Rank #3 (Hold) bank is also taking measures to further diversify operations. In September 2022, the company announced a deal to acquire Renovite. In December 2022, it acquired a 49% stake in Greece-based Viva Wallet, while in August, the company completed the deal to buy Global Shares. These, along with several others, are expected to keep supporting the bank’s 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 (Strong Buy) stocks here.

Also, JPM is expanding its footprint in new regions and has a presence in 48 of 50 U.S. states. Apart from enhancing market share, the strategy will help the bank grab cross-selling opportunities by increasing its presence in the card and auto loan sectors. Apart from this, the company launched its digital retail bank Chase in the U.K. in 2021 and continues to expand investment banking and asset management operations in China.

JPMorgan remains focused on acquiring the industry’s best deposit franchise and strengthening its loan portfolio. Despite a tough operating backdrop, deposits and loan balances have remained solid over the past several years. As of Dec 31, 2022, the loans to deposits ratio was 49%.

JPMorgan has a solid capital deployment plan. Following the clearance of the 2022 stress test, the bank kept the quarterly dividend unchanged at $1 per share. Also, to maintain higher future capital requirements amid macroeconomic challenges, the company has temporarily suspended share repurchases. Nonetheless, the bank has resumed share buyback effective first-quarter 2023 as it reached the CET1 ratio target of 13% earlier than expected. The company intends to repurchase shares worth $12 billion this year. Driven by a strong capital position and earnings strength, the company is expected to sustain current capital deployments.

With a market cap of $396.2 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 marginally upward for 2023 over the past 30 days. The stock has rallied 8.6% over the past six months.

Bank of America: With total assets worth $3.05 trillion as of Dec 31, 2022, Bank of America 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 across North America and globally.

BAC is well-poised to benefit from higher interest rates. The company’s balance sheet is highly asset-sensitive, and rising rates will support top-line growth. Provided loans grow modestly and rates in the forward curve materialize, management projects NII in the first quarter of 2023 to be around $14.4 billion.

Bank of America continues to align its banking center network according to customer needs. These initiatives, along with the success of Zelle and Erica, have enabled it to improve digital offerings and cross-sell several products, including mortgages, auto loans and credit cards. The acquisition of Axia Technologies has further strengthened its healthcare payments business.

Prudent cost management continues to support this Zacks Rank #3 bank’s financials. Its expense-saving plan – Project New BAC (launched in 2011) – helped improve overall efficiency. Over the last several quarters, the company has incurred an average of $15 billion in expenses, despite undertaking strategic growth initiatives. The company expects expenses of $16 billion in the first quarter of 2023, inclusive of seasonally elevated payroll taxes.

Post the clearance of the 2022 stress test, Bank of America announced a dividend hike of 4.8% in July 2022, following a 17% hike in July 2021. In October 2021, the company’s share repurchase plan of $25 billion was renewed. In 2022, it returned $12 billion to shareholders in the form of buybacks and dividend payouts.

With a market cap of $230.2 billion, Bank of America’s efforts to improve revenues, strong balance sheet and expansion into new markets will support financials. Over the past month, the Zacks Consensus Estimate for earnings has remained unchanged for 2023. Over the past six months, shares of BAC have lost 17.9%.

BNY Mellon: Operating in 35 countries, BNY Mellon provides various products and services to individuals and institutions. Its global client base consists of financial institutions, corporations, government agencies, endowments and foundations, and high-net-worth individuals.

Higher interest rates will support BNY Mellon’s top-line growth. While the company’s net interest revenues (NIR) and NIM declined in 2020 and 2021, both rebounded solidly in 2022. With more interest rate hikes expected this year, NIR and NIM are expected to continue improving. Management anticipates NIR to grow roughly 20% this year.

This Zacks Rank #2 (Buy) company has been trying to gain a foothold in foreign markets and is undertaking several growth initiatives (including launching new services, digitizing operations and making strategic buyouts). In 2022, non-U.S. revenues constituted 36% of total revenues. Its international revenues are expected to continue improving as the demand for personalized services rises globally.

Following the clearance of the 2022 stress test, the company hiked its quarterly cash dividend by 9% to 37 cents per share in July. While BNY Mellon stopped share repurchases to meet the higher capital requirements, it announced a new share buyback program worth $5 billion, effective Jan 1, 2023. Driven by a strong capital position and earnings strength, the company is expected to sustain efficient capital deployments.

BNY Mellon has a market cap of $36.6 billion. Over the past 30 days, the Zacks Consensus Estimate for earnings has moved 1.3% upward for 2023. In the past six months, the stock has dipped 0.5%.

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Source: finance.yahoo.com

About the author


Hi there, I am Amanda and I work as an editor at impactinvesting.ai;  if you are interested in my services, please reach me at amanda.impactinvesting.ai

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