Earnings season is officially underway. And as is customary, bank stocks led the way. One reason for this is that bank stocks have been shown to reflect the health of the broader U.S. economy. When banks are making money from lending it means consumers and businesses are seeking loans. Borrowing can have a ripple effect into other sectors.
In 2019 banks faced a truly mixed bag of news. Weighing on stocks were declining interest rates and trade uncertainty that was disrupting supply chains. However banks that had a mortgage servicing arm were seeing home buying activity pick up as interest rates fell. And some of the large banks began to see growth in providing financial services such as wealth management.
And overlaying the entire sector is the continuing role of technology. Even the big banks have not been immune to the disruption caused by financial technology (fintech) companies. These businesses, such as PayPal (NASDAQ:PYPL) and Square (NYSE:SQ), are engaging consumers and businesses with services that used to be the domain of traditional banking.
Let’s take a look at three banks that look to be a solid buy after their earnings reports.
Best Bank Stocks to Buy: JPMorgan Chase (JPM)
Revenue was up 8% year over year. The bank also posted a strong net income number and saw their trading revenue increase as well. This made it seven out of the last eight quarters that JPMorgan has beat on both the top and bottom lines. Analysts have been upgrading the stock. And this is creating optimism that the stock will continue on the uptrend that began in September.
Over the past 10 years, JPMorgan stock is up 250%, nearly doubling its next closest banks. But even if you narrow the focus to the last five years, or just one year, JPM is still the best performing bank stock. And for investors looking at bank stocks for that all-important dividend, JPMorgan does not disappoint. The company is scheduled to pay its next quarterly dividend on Jan. 31. The company has increased its dividend for the last nine years by an average of 20.84% each year. JPM’s payout ratio is 34.35%.
Citigroup (NYSE:C) is another bank that had a comfortable beat for both earnings and revenue. This was the icing on the cake of what has been Citi’s best year since 1999.
The company’s stock rose 53% in 2019, outpacing JPMorgan Chase and Bank of America (NYSE:BAC). Analysts are also praising Citigroup stock with Wells Fargo senior bank analyst Mike Mayo saying that Citigroup is his number one pick “because it’s just so inexpensive and they’re buying back so many stock.” Mayo went on to say that investors are underappreciating the stock’s ability to reduce risk.
Prior to the company’s earnings report, InvestorPlace.com contributor Laura Hoy wrote that Citigroup may be one of the best value stocks among the big banks. New management is starting to deliver on the company’s pledge to become leaner and more efficient. Of course with a company that has a heavy footprint in the credit card sector, the stock is not without risk. However, a generous and reliable dividend can help take the risk away from investors.
Morgan Stanley (MS)
When it comes to bank stocks, Morgan Stanley (NYSE:MS) may not be the top of mind. However, Morgan Stanley was another firm that recorded a beat on both the top and bottom lines.
Like JPMorgan, Morgan Stanley is making beating expectations something of a habit. This made it 18 out of the last 20 quarters that the company has come in with results that beat consensus estimates. Morgan Stanley has exasperated some analysts with its habit of setting low expectations and then easily beating them.
But from my perspective, the important thing to note about Morgan Stanley’s report was the growth in its wealth management business. Morgan Stanley posted an 11% increase in its wealth management division. Better still, the company issued a two-year outlook for the division that was calling for the company’s pretax margin to be in a range of 28% to 30%.
Ironically, Morgan Stanley may be a bank stock that may benefit if the markets cool off. With discount brokers now offering commission-free trading, it has become easy for novice investors to buy and sell stock. But Morgan Stanley believes its clients pay for expertise over automation. And that experience will be desirable in a more “normal” market.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.