Ever since the financial implosion of 2008-09, U.S. banks have had to pass a series of “stress tests” to prove to the government that they have the financial resources to survive another downturn. These tests are also a good time for investors in this sector to assess banks that have strengthened their position in the past year and banks in danger of flunking.
Bloomberg News recently reported that the dividends and buybacks of the 25 biggest banks will be about $30 billion more than 2017. That represents a jump of about 25%.
As a group, U.S. banks have had a good year so far. The economy is still humming, so they have not had to deal with many loans that turned out to be riskier than anticipated. Congress and President Donald Trump have rolled back some of the more onerous requirements of the Dodd-Frank legislation that passed during the Obama years, and lower corporate tax rates have kept the party rolling.
The key question, though, is which banks will continue to prosper when times get tougher. The Federal Reserve will release the first round of test results on Thursday. Here is a look at the fundamentals of several leading banks:
JP Morgan Chase (NYSE:JPM) stock has been one of the more consistent performers in an often volatile sector, with share prices rising steadily over the last 10 years. That is because the company’s core business has also grown. JP Morgan is opening about 400 branches to enter at least 15 new markets over the next several years.
Bank of America (NYSE:BAC) is another bank with an extremely well-known name that has thriving branches in many leading markets. Another plus is that 2018 may be a higher volatility year in terms of interest rates, as the Federal Reserve may try to apply the brakes amid signs of rising inflation. That is actually good news for BAC’s trading desk, which generates more revenue when investors are responding to more short-term changes in the market. The firm’s cash return to shareholders has been particularly generous, rising 23% in the past four quarters compared to the preceding four.
Citigroup (NYSE:C) has dropped significantly in recent months. Fears about political instability in Italy, where Citigroup has a large market shares, plus slowing revenue overall caused some analysts to turn against the stock. But the company has a long record track record of rebounding from adversity, and could do so again.
Wells Fargo (NYSE:WFC) suffered through a major scandal last year, in which millions of bogus bank accounts were created on behalf of customers without their consent. The company, whose name goes back to the nineteenth century, has been reduced to running mawkish advertisements promising to “do better.” Its lost revenue in the wake of the controversy has made it the one major U.S. bank that is at significant risk of failing the stress tests.
Of this group, Bank of America and JP Morgan Chase are the best picks for long-term growth. Citigroup is more of a wild card, but could gain back much of its lost ground if its next earnings report is impressive. Wells Fargo should be avoided until it is clear it has fixed its internal problems.
As of this writing, Thomas Scarlett did not hold a position in any of the aforementioned securities.