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3 Major Regional Banks to Watch Despite High Rates, Waning Loans
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The Zacks Major Regional Banks industry is expected to keep witnessing subdued net interest income (NII) and net interest margin (NIM) performance as funding costs rise. Higher interest rates due to the Federal Reserve’s aggressive hikes, which generally benefit banks, are turning out counter-productive. Deteriorating asset quality, the expectations of an economic slowdown and gradually waning loan demand are other key near-term headwinds.
However, business restructuring/expansion initiatives and digitization will offer much-needed support. Hence, JPMorgan Chase & Co. (JPM - Free Report) , Bank of America Corp. (BAC - Free Report) and Citigroup Inc. (C - Free Report) are worth keeping an eye on.
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 & Pressure on NIM: The Fed’s aggressive monetary policy since March 2022 has led the rates to touch a 22-year high of 5.25-5.5%, as it continues to fight ‘sticky’ inflation. Rising interest rates are a boon for major regional banks, and they reaped huge benefits in the form of higher NIM and NII last year. However, faster rate hikes after a prolonged period of low rates had their fallout, as we saw the collapse of Silicon Valley Bank, Signature Bank and First Republic Bank and deposit outflows early this year.
While the regional banking crisis is somewhat contained following decent first-half 2023 results, higher rates are now turning out a bane for major regional banks. Also, resilient consumers, tight labor markets and better-than-expected economic growth are expected to lead the central bank to keep the rates high for a longer period. This is likely to lead to a major fallout across industry players’ NII and NIM growth in the upcoming period as funding costs continue to increase.
Waning Loan Demand: The Fed’s aggressive monetary policy has intensified the fears of an economic downturn. Even the Fed’s Summary of Economic Projections, announced in June, indicated that the U.S. economy would witness a slowdown this year, with just 1% growth. While major regional banks are better equipped to face this situation due to the reforms introduced after the 2008 financial crisis, the lending backdrop continues to be muted as the demand for loans gradually declines.
Asset Quality Metrics Touch 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 COVID-19 mayhem. This considerably hurt their financials. But with solid economic growth and support from government stimulus packages, banks began to release these reserves back into the income statement. Now, given the current macroeconomic headwinds, industry players 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 actions to expand into new avenues and lower their dependence on spread income. The 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. Banks are also aggressively expanding their footprint outside the United States and into Europe and China. Banks are re-evaluating their business structure to simplify operations and do away with unprofitable ones.
Zacks Industry Rank Implies 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 #204, which places it in the bottom 19% 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 a 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. Over the past year, the industry’s earnings estimates for the current year have been revised 5.4% lower.
Before we present a few major bank stocks that are worth a look despite bleak near-term prospects, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Underperforms the Sector and the S&P 500
The Zacks Major Regional Banks industry has widely underperformed both the S&P 500 composite and its sector over the past two years. While stocks in this industry have collectively decreased 21.2% over the period, the Zacks S&P 500 composite has declined just 3.2% and the Zacks Finance sector has fallen 7.9%.
Two-Year Price Performance
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 1.63X. This compares with the highest level of 2.48X, the lowest of 1.21X and the median of 2.02X 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 9.97X, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
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. However, 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 4.38X. This is way above the Zacks Major Regional Banks industry’s ratio, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
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 keep benefiting from higher rates (funding costs to put strain), loan growth, strategic buyouts, business diversification efforts, a strong liquidity position and initiatives to expand the branch network in new markets.
In early May, JPM took over the failed First Republic Bank for $10.6 billion after almost two months of joint efforts with other lenders to save the flagging institution. The deal, which added deposits of almost $92 billion, roughly $173 billion of loans and $30 billion of securities to the banking behemoth’s balance sheet, continues to be accretive to the top and bottom lines. The company expects NII to be $87 billion this year, up from the prior guidance of $84 billion.
Additionally, this Zacks Rank #1 (Strong Buy) lender has been growing through on-bolt acquisitions, both domestic and international. In June, the company formed a strategic alliance with Cleareye.ai, a financial technology firm focused on trade finance. Meanwhile, in May, the company acquired Aumni. Last year, it acquired Renovite, a 49% stake in Greece-based Viva Wallet and Global Shares. These, along with several others, are expected to keep aiding its 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 stocks here.
Also, JPM is expanding its footprint in new regions and has a presence in 48 of 50 U.S. states. It intends to further expand its retail branches. The company targets having 70% of the U.S. population (up from the current 60%) within a 10-minute drive to the branch. The strategy continues to help the bank grab cross-selling opportunities by increasing its presence in the card and auto loan sectors. Also, the company launched its digital retail bank Chase in the U.K. in 2021 and plans to further expand the reach of its digital bank across the European Union countries.
JPMorgan remains focused on strengthening its loan portfolio. Despite a tough operating backdrop, loan balances have remained solid over the past several years. As of Jun 30, 2023, the loans to deposits ratio was 54%. Though a potential economic slowdown and high rates will hamper loan demand, the company will be able to capitalize on its scale to record decent loan growth going forward.
With a market cap of $432.9 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 month. The stock has rallied 11.4% year to date.
Price and Consensus: JPM
Bank of America: With total assets worth $3.12 trillion as of Jun 30, 2023, 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 rates as its balance sheet is highly asset-sensitive. While rising funding costs will weigh on NII growth, management projects the metric to rise more than 8% this year.
Bank of America continues to align its banking center network according to customer needs. It is set to embark on an ambitious expansion plan to open financial centers in both new and existing markets. By 2026, the company plans to expand its financial center network into nine new markets. 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.
This Zacks Rank #3 (Hold) company remains focused on strengthening its loan portfolio. Despite a tough operating environment, loan balances have remained solid over the past several years. As of Jun 30, 2023, the company’s total loans and leases grew 2% year over year to $1.05 trillion. While the tightening of the monetary policy and the probable economic slowdown are near-term headwinds, the demand for loans is expected to remain decent in the quarters ahead.
With a market cap of $231.3 billion, Bank of America’s efforts to improve revenues, strong balance sheet and expansion into new markets will aid financials. Over the past month, the Zacks Consensus Estimate for 2023 earnings has moved slightly north. Year to date, shares of BAC have dropped 12%.
Price and Consensus: BAC
Citigroup: As a globally diversified financial services holding company, Citigroup provides a range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage and wealth management. The company has nearly 200 million customer accounts in almost 160 countries and jurisdictions.
Similar to JPM and BAC, Citigroup will continue to benefit from a higher interest rate regime and decent loan growth. For 2023, management expects revenues (excluding 2023 divestiture-related impacts) in the band of $78-$79 billion, up in the range of 3-5% year over year. NII (excluding Markets) is expected to be more than $46 billion, an increase from the prior guidance of $45 billion.
This Zacks Rank #3 bank continues to increase its fee-based business mix and shrink non-core assets. C has been investing in growth opportunities across wealth and commercial banking, treasury and trade solutions, and securities service businesses to grow fee revenues across the Institutional Clients Group segment.
Citigroup is streamlining operations internationally. In sync with this, the company announced a major strategic action in April 2021 to exit consumer banking across 14 markets in Asia, Europe, the Middle East and Mexico. Since then, it has signed deals to divest consumer businesses in nine markets and completed sales in eight markets.
The company is also winding down its consumer business in China and Korea, whereas, in Russia, it is wrapping up all its businesses. Further, this May, Citigroup revealed its plan to pursue an IPO of the Mexican business in 2025.
Such exits will free up capital and help the company pursue investments in wealth management operations in Singapore, Hong Kong, the UAE and London to stoke growth. These efforts are likely to help augment the company’s profitability and efficiency over the long term.
Citigroup has a market cap of $82.3 billion. A diverse business model, a focus on core operations and the streamlining of international businesses will keep supporting the company’s prospects. Over the past 30 days, the Zacks Consensus Estimate for 2023 earnings has been revised marginally upward. In the year-to-date period, the stock has declined 7%.
Price and Consensus: C
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3 Major Regional Banks to Watch Despite High Rates, Waning Loans
The Zacks Major Regional Banks industry is expected to keep witnessing subdued net interest income (NII) and net interest margin (NIM) performance as funding costs rise. Higher interest rates due to the Federal Reserve’s aggressive hikes, which generally benefit banks, are turning out counter-productive. Deteriorating asset quality, the expectations of an economic slowdown and gradually waning loan demand are other key near-term headwinds.
However, business restructuring/expansion initiatives and digitization will offer much-needed support. Hence, JPMorgan Chase & Co. (JPM - Free Report) , Bank of America Corp. (BAC - Free Report) and Citigroup Inc. (C - Free Report) are worth keeping an eye on.
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 & Pressure on NIM: The Fed’s aggressive monetary policy since March 2022 has led the rates to touch a 22-year high of 5.25-5.5%, as it continues to fight ‘sticky’ inflation. Rising interest rates are a boon for major regional banks, and they reaped huge benefits in the form of higher NIM and NII last year. However, faster rate hikes after a prolonged period of low rates had their fallout, as we saw the collapse of Silicon Valley Bank, Signature Bank and First Republic Bank and deposit outflows early this year.
While the regional banking crisis is somewhat contained following decent first-half 2023 results, higher rates are now turning out a bane for major regional banks. Also, resilient consumers, tight labor markets and better-than-expected economic growth are expected to lead the central bank to keep the rates high for a longer period. This is likely to lead to a major fallout across industry players’ NII and NIM growth in the upcoming period as funding costs continue to increase.
Waning Loan Demand: The Fed’s aggressive monetary policy has intensified the fears of an economic downturn. Even the Fed’s Summary of Economic Projections, announced in June, indicated that the U.S. economy would witness a slowdown this year, with just 1% growth. While major regional banks are better equipped to face this situation due to the reforms introduced after the 2008 financial crisis, the lending backdrop continues to be muted as the demand for loans gradually declines.
Asset Quality Metrics Touch 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 COVID-19 mayhem. This considerably hurt their financials. But with solid economic growth and support from government stimulus packages, banks began to release these reserves back into the income statement. Now, given the current macroeconomic headwinds, industry players 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 actions to expand into new avenues and lower their dependence on spread income. The 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. Banks are also aggressively expanding their footprint outside the United States and into Europe and China. Banks are re-evaluating their business structure to simplify operations and do away with unprofitable ones.
Zacks Industry Rank Implies 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 #204, which places it in the bottom 19% 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 a 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. Over the past year, the industry’s earnings estimates for the current year have been revised 5.4% lower.
Before we present a few major bank stocks that are worth a look despite bleak near-term prospects, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Underperforms the Sector and the S&P 500
The Zacks Major Regional Banks industry has widely underperformed both the S&P 500 composite and its sector over the past two years. While stocks in this industry have collectively decreased 21.2% over the period, the Zacks S&P 500 composite has declined just 3.2% and the Zacks Finance sector has fallen 7.9%.
Two-Year Price Performance
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 1.63X. This compares with the highest level of 2.48X, the lowest of 1.21X and the median of 2.02X 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 9.97X, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
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. However, 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 4.38X. This is way above the Zacks Major Regional Banks industry’s ratio, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
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 keep benefiting from higher rates (funding costs to put strain), loan growth, strategic buyouts, business diversification efforts, a strong liquidity position and initiatives to expand the branch network in new markets.
In early May, JPM took over the failed First Republic Bank for $10.6 billion after almost two months of joint efforts with other lenders to save the flagging institution. The deal, which added deposits of almost $92 billion, roughly $173 billion of loans and $30 billion of securities to the banking behemoth’s balance sheet, continues to be accretive to the top and bottom lines. The company expects NII to be $87 billion this year, up from the prior guidance of $84 billion.
Additionally, this Zacks Rank #1 (Strong Buy) lender has been growing through on-bolt acquisitions, both domestic and international. In June, the company formed a strategic alliance with Cleareye.ai, a financial technology firm focused on trade finance. Meanwhile, in May, the company acquired Aumni. Last year, it acquired Renovite, a 49% stake in Greece-based Viva Wallet and Global Shares. These, along with several others, are expected to keep aiding its 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 stocks here.
Also, JPM is expanding its footprint in new regions and has a presence in 48 of 50 U.S. states. It intends to further expand its retail branches. The company targets having 70% of the U.S. population (up from the current 60%) within a 10-minute drive to the branch. The strategy continues to help the bank grab cross-selling opportunities by increasing its presence in the card and auto loan sectors. Also, the company launched its digital retail bank Chase in the U.K. in 2021 and plans to further expand the reach of its digital bank across the European Union countries.
JPMorgan remains focused on strengthening its loan portfolio. Despite a tough operating backdrop, loan balances have remained solid over the past several years. As of Jun 30, 2023, the loans to deposits ratio was 54%. Though a potential economic slowdown and high rates will hamper loan demand, the company will be able to capitalize on its scale to record decent loan growth going forward.
With a market cap of $432.9 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 month. The stock has rallied 11.4% year to date.
Price and Consensus: JPM
Bank of America: With total assets worth $3.12 trillion as of Jun 30, 2023, 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 rates as its balance sheet is highly asset-sensitive. While rising funding costs will weigh on NII growth, management projects the metric to rise more than 8% this year.
Bank of America continues to align its banking center network according to customer needs. It is set to embark on an ambitious expansion plan to open financial centers in both new and existing markets. By 2026, the company plans to expand its financial center network into nine new markets. 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.
This Zacks Rank #3 (Hold) company remains focused on strengthening its loan portfolio. Despite a tough operating environment, loan balances have remained solid over the past several years. As of Jun 30, 2023, the company’s total loans and leases grew 2% year over year to $1.05 trillion. While the tightening of the monetary policy and the probable economic slowdown are near-term headwinds, the demand for loans is expected to remain decent in the quarters ahead.
With a market cap of $231.3 billion, Bank of America’s efforts to improve revenues, strong balance sheet and expansion into new markets will aid financials. Over the past month, the Zacks Consensus Estimate for 2023 earnings has moved slightly north. Year to date, shares of BAC have dropped 12%.
Price and Consensus: BAC
Citigroup: As a globally diversified financial services holding company, Citigroup provides a range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage and wealth management. The company has nearly 200 million customer accounts in almost 160 countries and jurisdictions.
Similar to JPM and BAC, Citigroup will continue to benefit from a higher interest rate regime and decent loan growth. For 2023, management expects revenues (excluding 2023 divestiture-related impacts) in the band of $78-$79 billion, up in the range of 3-5% year over year. NII (excluding Markets) is expected to be more than $46 billion, an increase from the prior guidance of $45 billion.
This Zacks Rank #3 bank continues to increase its fee-based business mix and shrink non-core assets. C has been investing in growth opportunities across wealth and commercial banking, treasury and trade solutions, and securities service businesses to grow fee revenues across the Institutional Clients Group segment.
Citigroup is streamlining operations internationally. In sync with this, the company announced a major strategic action in April 2021 to exit consumer banking across 14 markets in Asia, Europe, the Middle East and Mexico. Since then, it has signed deals to divest consumer businesses in nine markets and completed sales in eight markets.
The company is also winding down its consumer business in China and Korea, whereas, in Russia, it is wrapping up all its businesses. Further, this May, Citigroup revealed its plan to pursue an IPO of the Mexican business in 2025.
Such exits will free up capital and help the company pursue investments in wealth management operations in Singapore, Hong Kong, the UAE and London to stoke growth. These efforts are likely to help augment the company’s profitability and efficiency over the long term.
Citigroup has a market cap of $82.3 billion. A diverse business model, a focus on core operations and the streamlining of international businesses will keep supporting the company’s prospects. Over the past 30 days, the Zacks Consensus Estimate for 2023 earnings has been revised marginally upward. In the year-to-date period, the stock has declined 7%.
Price and Consensus: C
