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4 Bank Stocks Every Investor Needs to Watch Now

Fiscal conservatives might be close to an “I told you so” moment. Critics have long blasted the indefinite reign of the U.S. Federal Reserve’s quantitative easing program, which has created a headwind for lending institutions. Notably, Republican presidential hopeful Donald Trump weighed in, accusing the low interest rate environment as being politically motivated. But soon, everyone — even those who haven’t bought into the “Big Four” bank stocks — may be joining the chorus of discontent.

4 Bank Stocks Every Investor Needs to Watch Now

With the benchmark 10-year Treasury rates near record lows, that obviously doesn’t leave much profit margin for the big bank stocks. Worse yet, the uncertain nature of the economy is discouraging many folks from borrowing money. But the greater picture is that major bank stocks are literally the lifeblood of all sectors in the economy.

Like it or not, the trajectory of the Big Four institutions will more than likely define the framework of the markets.

Bank stocks aren’t just isolated to purely financial metrics like interest rates. According to accounting firm Ernst & Young, independent oil and gas companies are the “largest users of reserve-based lending (RBL) facilities.” RBLs are an alternative form of financing that involves using an oil company’s undeveloped reserves as collateral. This wasn’t an issue when oil rigs were raking in the money. But with challenged energy prices, smaller oil firms can’t make money, which in turn crimps on the Big Four.

Although it was sharply criticized by various grassroots political movements, major bank stocks represent a significant holding of several exchange-traded funds. Similar to the often-maligned “Big Oil” firms, a vast number of retirement funds are sure to feature generous scoops of institutional bank stocks. Without their leverage, most market rallies would be dead on arrival.

Simply put, without the Big Four, there is no economy. Here are the bank stocks that you need to watch right now!

Bank Stocks to Watch: JPMorgan Chase & Co. (JPM)

Bank stocks, JPM
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Source: Source: JYE Financial, unless otherwise indicated

JPMorgan Chase & Co. (NYSE:JPM) may be the most recognized of the Big Four bank stocks, but that doesn’t mean they can escape the fundamental challenges pressuring the sector.

Recently, federal regulators have warned that higher interest rates may be a risk factor, not a panacea. Rising rates would increase profit margins, but also increase the costs associated with servicing debt. With long-term debt and capital lease obligations moving up 14% over the last four years, JPM is hardly immune to this risk.

More of the same wouldn’t be the answer for JPM, either. Despite the fact that the current environment favors borrowers, interest income has fallen 9% since fiscal year 2012. Total revenue has declined by nearly 4% over the same time frame, which is problematic. If people and businesses don’t want to risk borrowing when benchmark rates are below 2%, it seems completely illogical that they would indebt themselves at a higher cost.

From a technical perspective, JPM clearly has an advantage over the other bank stocks. For one thing, it’s actually in positive territory for the year. But at a modest gain of roughly 2%, JPM is not a real winner here. I would especially be cautious in the immediate time frame. JPM stock has jumped 18% since bottoming in June. Given the choppy waters, bank stocks have seen overall, a near-term correction wouldn’t be out of the ordinary.

JPM’s status among the Big Four isn’t in question, but the weather calls for some turbulence.

Bank Stocks to Watch: Citigroup Inc (C)

Bank stocks, C stock
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Source: Source: JYE Financial, unless otherwise indicated

Citigroup Inc (NYSE:C) has been making the most of its summer rebound. Since crashing hard in late June, C stock is up over 23%, inviting traders into a possible momentum play.

But as technical analysts have noted, Citigroup is still very much in bear market territory. Year-to-date, C stock is down 8%, and against its peak price from last year, shares are down nearly 22%.

Can it break upside resistance, or will there be more trouble ahead?

As with other bank stocks, the financials aren’t very favorable for C shares. Interest income for FY 2015 was down 5% against the prior year. It was also the sixth year in a row that interest income declined. What’s really bothering C stock investors is the lack of substantial loan growth in recent quarters. Also, total revenue is substandard, with the first two quarters of this year averaging losses exceeding 10% year-over-year.

One positive to note is that long-term debt exposure has significantly declined last fiscal year, and the trend is continuing into the recent quarter. That may help offset some risk should the Fed actually adopt a hawkish monetary policy. Unfortunately, a broad decline in assets from reductions in money market investments and circulating loans means that C stock could continue trading sideways.

Citigroup may be a key member of the Big Four, but it still has a lot of work to do.

Bank Stocks to Watch: Bank of America Corp (BAC)

BAC, Big Four, bank stocks
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Source: Source: JYE Financial, unless otherwise indicated

If there ever was a Cinderella story among the Big Four bank stocks, Bank of America Corp (NYSE:BAC) would be it. After being left for dead from the aftermath of the subprime mortgage crisis, BAC underwent a remarkable recovery. But that was then, and this is now.

Investors aren’t looking to design a Hallmark greeting card. Can BAC still generate adequate returns after its second honeymoon phase?

Don’t hold your breath.

While its other Big Four rivals have middling financial metrics that weigh on them, BAC has to contend with far more serious issues. One of them is profitability margins, which are worse than a majority of publicly traded bank stocks. That’ll hurt more if key interest rates rise. But with total revenue down 7% in the last three years, one wonders how BAC will adjust to any shifts.

The technical picture doesn’t offer any comfort. Sure, BAC stock is up nearly 30% from its June bottom. But despite this massive gain in market value, BAC is still behind the YTD curve by a 6% margin. That won’t sit well for those looking to hold shares for the long haul.

BAC should be credited for its turnaround story. However, it’s a brand new series now, and the first few pages don’t look too hot.

Bank Stocks to Watch: Wells Fargo & Co (WFC)

WFC, Big Four, bank stocks
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Source: Source: JYE Financial, unless otherwise indicated

Generally considered the most stable among the Big Four bank stocks due to its diversified business portfolio, Wells Fargo & Co. (NYSE:WFC) has been fortunate enough to keep its nose clean.

While many of its competitors suffered severe repercussions from predatory lending practices, WFC maintained a relatively clean balance sheet. That enabled Wells Fargo’s once-in-a-lifetime deal to snag Wachovia. But with new developments in the economy, can WFC pull off a repeat should the situation arise?

As far as bank stocks are concerned, WFC is hitting the right buttons. Interest income has steadily risen over the three years. In the most recent quarter, it jumped to nearly 8% against the year-ago level. Net loan growth is also very impressive, jumping 12% since FY 2013. Furthermore, money market investments have gained 26% over the same time frame. But rapidly rising debt levels are a risk factor, considering recent hawkish comments from the Fed.

The other big variable is the technical performance of WFC. One would expect from credentials alone that WFC would lead the pack. Instead, it’s down 8% YTD, the second-worst among the Big Four institutions. Weaving a similar tale to the broader industry, WFC stock can’t seem to break out of its horizontal trend channel.

There’s no doubt that if you had to buy one of the bank stocks, WFC would be it. But it’s not acting as it should, and that leaves a lot of question marks.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2016/09/4-bank-stocks-watch-now-bac-jpm-c-wfc/.

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