Bank stocks are taking a pounding as Covid-19 ravages stock markets the world over, resulting in trillions of dollars lost and a global recession, according to S&P.
The panic notwithstanding, the virus does offer a silver lining for investors that are hunting for bargains, especially in the financial institution space. That’s why we have compiled a list of three bank stocks that should help you sleep soundly at night.
Although the current situation may remind investors of the 2008 financial crisis, there are several unique factors that you should have in your mind before commenting on the crisis. Firstly, this current crisis is not because of big financial institutions failing, rather it is because of a prolonged illness that has destroyed traditional income lines for businesses.
However, what you need to know is that despite how bad things are at the moment, it’s nothing compared to what happened back in 2008, where the Financial Select Sector SPDR Fund (NYSEARCA:XLF) lost 90% of its value before bottoming.
There is no such concern here, and although stocks fell almost 45% from January peak to March trough, they still have not plummeted to the level where you can wash your hands completely off of the stock market, but they are enough to test the mettle of any bullish investor.
That’s why we went back to the drawing board and took another look at three of the biggest bank stocks in terms of market capitalization to see where they are at the moment and what the numbers can tell us where they will end up next.
Specifically, we looked at the net interest margin, net interest income and the dividend yield of large banks, ranking them by market capitalization:
|Company||Market Capitalization ($B)||Net Interest Income ($B)||Dividend Yield (%)||Net Interest Margin (%)|
It’s important to note before we proceed further that the analysis is restricted to companies listed on the S&P 500 and does not include companies listed on the pink sheets.
Bank Stocks to Buy: JPMorgan Chase (JPM)
Net Interest Income: $57.25 billion
JPMorgan Chase (NYSE:JPM) is the largest bank in the United States and the sixth-largest bank in the world, with total assets amounting to $2.687 trillion. Our data also shows that the company is the biggest bank stock in terms of market cap.
Although these are some impressive figures, especially among bank stocks, there are other reasons to be optimistic regarding this stock and chief among them is the strategic leadership of CEO Jamie Dimon. The executive has certainly attracted bouquets and brickbats in equal measure during his tenure, but undoubtedly he has revolutionized the way the bank does business.
Dimon has already laid out aggressive expansion plans in JPMorgan’s recent annual report for its future growth. He admitted that the company was slow in taking up the technology. Still, it’s now investing heavily in artificial intelligence, big data and machine learning capabilities that should put it in excellent stead for the future.
Net interest income on a TTM basis is $57.25 billion, an outstanding statistic, but what’s even more impressive is that looking ahead, the company has forecasted guidance of $57 billion-plus for the fiscal year 2020, translating to a year-on-year decline of 1%, incorporating the effect of headwinds and lower rates. On a more positive note, the company is forecasting net interest income of approximately $60 billion, due to sustained growth in card loans and deposits.
Rest of the metrics have also remained stable, with a dividend yield at 3.9%, an outstanding figure as compared to the rest of the industry. Meanwhile, the net interest margin is 2.82, which could be better, but considering the headwinds the bank faced in recent quarters, the figure is not that bad.
Before we wrap up our discussion of JPM stock, we should take a look at the efficiency ratio of the stock and how is that expected to oscillate shortly. JPM management expects the rate to decrease soon due to its substantial $12 billion of investments in technology. But over time, the efficiency ratio will gain strength moving forward due to the cost efficiencies that come with increasing the use of technology in the workflow.
We’ve highlighted how the fundamentals offer a compelling case for the stock, but certain negative factors could end up causing a steep drop in share value moving forward. These factors include a prolonged U.S. recession, regulatory risks and potential rate hikes due to coronavirus fears.
However, despite these factors, I believe the stock should hit $150 and on a five-year horizon, its worth having the stock in your portfolio in the long run.
Bank of America (BAC)
Net Interest Income: $48.89 billion
Bank stocks are down across the board. JPMorgan Chase, Citigroup (NYSE:C), U.S. Bancorp (NYSE:USB) and Wells Fargo (NYSE:WFC) have all reported double-digit losses since coronavirus reared its ugly head at the start of the year.
Charlotte-based BAC is no different, with the stock receiving a hammering of more than 30%. Still, a closer look reveals that the drop in share price is not due to underlying fundamentals, and instead, it is related to coronavirus fears, in line with the general stock market.
But the loss in share value offers a lot of incentive for investors to buy into the stock at a lower price point. After all, its nowhere near the situation the bank found itself after the global financial crisis in 2008, where the stock plummeted to as low as $2 per share after hitting a record of $54 in 2007.
BAC unveiled its fourth-quarter earnings for 2019 on 15 January 2020, and it was a solid quarter of growth. BAC reported a 6% year-on-year increase in growth, with sales & trading revenues growing by 13% as fixed-income trading rose by 25%.
On a bit of a down note, the company reported a decrease in efficiency and net interest income, the former because of increasing costs and the latter due to lower interest rates. I believe the long-term earnings growth potential of the company is reflective in terms of the quality quarter the company just had.
Looking ahead, there are several reasons to remain bullish on the stock. Firstly, we are in the middle of the longest bull run in U.S. history, notwithstanding the coronavirus epidemic. The global economy is also growing exponentially, and big-cap stocks like BAC are in an ideal situation to take advantage of the situation.
Additionally, the Fed has cut rates to stave off the market fluctuations due to the virus. Still, in all honesty, it seems a matter of time before we get to see some rate hikes, and that should help drive earnings growth and intrinsic value for the company.
BAC’s forward P/E ratio is under ten at the moment. It is indicative of the bumper potential for the company among bank stocks, considering the relatively low P/E figure and its potential for long-term growth. Lastly, Bank of America is also downsizing extensively in the hopes of realizing cost efficiencies, and the efficiency ratio will reflect these initiatives moving forward.
To sum up, the decline in BAC’s stock price is a temporary phenomenon, primarily caused by the shudders caused by the virus. Markets will absorb the impact eventually, and it is expected that ultimately, the markets will bounce back. I am forecasting to the stock to regain ground and finish at $30 a pop before the year closes, assuming we beat the virus within three to six months.
Wells Fargo (WFC)
Net Interest Income: $47.23 billion
Rounding up our analysis is Wells Fargo, a stock that has taken the biggest beating out of all the major banking names. Although it’s anyone’s guess when this crisis shall end, it’s just the latest in a long series of bad news for the bank.
Chief of the issues the bank is facing and continues to face is regulatory pressure. It was just last week that the Chair of the House Financial Services Committee asked the chairman of the bank to step down, sending the share price into a spiral.
That’s not all, CEO Charlie Scharf did not get a chance to address any of these issues, as he spent the better part of last week being grilled by the House Financial Services Committee for its role in various scandals, so you can well imagine that the bank won no favors with the general investor base.
Compounding these issues are general fears that the coronavirus will have a sustained impact on several industries, particularly tourism and airline, which will ultimately lead to a softening of the share price. Concerns of an inverted yield curve and lending risks are also weighing heavily on the banking sector, but the current selloff seems overblown.
Wells Fargo is not a small financial institution, and in the current environment, the U.S. administration is likely to go easy on the bank moving forward. As of the fourth quarter, the company had more than $1.322 trillion in deposits, $962 billion in outstanding loans, so it’s not a featherweight by any stretch of the imagination.
As of this writing, Faizan Farooque did not hold a position in any of the aforementioned securities.