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Zacks Industry Outlook Highlights: JPMorgan Chase, Wells Fargo and KeyCorp

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For Immediate Release

Chicago, IL – May 7, 2021 – Today, Zacks Equity Research discusses Regional Banks, including JPMorgan Chase & Co. (JPM - Free Report) , Wells Fargo & Company (WFC - Free Report) and KeyCorp (KEY - Free Report) .

Link: https://www.zacks.com/commentary/1509332/3-stocks-from-the-flourishing-major-regional-bank-industry

The Zacks Major Regional Banks industry continues to bear the brunt of near-zero interest rates and muted lending scenarios. Though there has been a gradual economic rebound, these unfavorable factors will keep hampering growth in banks’ net interest margins and net interest income.

However, business restructuring and expansion initiatives, along with technological investments, are likely to provide considerable support. Further, robust asset quality, significant reserve releases and sustained economic recovery are likely to be tailwinds. JPMorgan ChaseWells Fargo and KeyCorp are expected to gain from these positive trends.

About the Industry

The Zacks Major Regional Banks industry includes the nation’s largest banks in terms of assets, with most operating globally. Financial performance of these banks largely depends on the nation’s economic health. As the banks are involved in a number of 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 interest income, major regional banks provide a wide range of financial services and products to retail, corporate as well as institutional clients, both domestic and global. These include credit and debit cards, wealth management and investment banking, among others. So, a large source of revenues for these banks comprises fees and commission earned from these services.

4 Key Themes Shaping the Major Regional Bank Industry

Business Restructuring & Digitization Offer Support: Major regional banks are taking measures to counter fallout from low rates by restructuring operations and expanding in other avenues. One of the main driving factors is the need for technological advancement.

The banks are investing heavily in artificial intelligence and other digital platforms, and even partnering/acquiring providers of such services as there have been a significant rise in demand for these amid the coronavirus pandemic. The efforts are expected to improve online and mobile banking services, as well as ward off competition from Fintech and other large tech companies. Further, it will help banks save time and provide less error-prone services, thereby improving operating efficiency.

Asset Quality Show Signs of Improvement: For the most part of 2020, major regional banks built additional provisions to tide over unexpected defaults and payment delays owing to the economic slowdown resulting from the coronavirus mayhem. This substantially hurt their profitability in the first half of the year.

However, with gradual economic revival and favorable developments related to COVID-19 vaccine, banks have begun releasing these reserves, thus supporting the bottom-line growth. Further, government stimulus package is expected to support banks’ asset quality in the near term.

Full-on Capital Distributions to Resume: Most major regional banks had voluntarily paused share buybacks in March 2020 to preserve liquidity amid economic uncertainty. Then in June, the Fed, following the annual stress test, restricted dividend payments and suspended repurchases. Now, subsequent to the second round of stress test, the central bank permitted the banks to resume buybacks from this year (with certain restriction).

Hence, several major banks, having already come out with their buyback plans, resumed the same from first-quarter 2021. Further, in March 2021-end, the central bank stated that major regional banks can hike dividends and pursue buybacks (without any restrictions), effective second-half 2021, once they clear this year’s stress test.

Low Rates & Soft Loan Demand Hurt Revenues: Major regional banks substantially benefit from higher interest rates. However, in March 2020, the Fed slashed the interest rates to near zero to support the U.S. economy from the coronavirus-related mayhem.

Since then, the central bank has been signaling no chance of rate hike anytime soon. Also, loan demand continues to be weak. Thus, these factors will hurt the banks’ net interest margin and net interest income to some extent.

Zacks Industry Rank Indicates Bright 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 #54, which places it in the top 21% of nearly 253 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of encouraging earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimates for the current year have been revised by 43.9% upward.

Before we present a few stocks that you may want to add to your portfolio despite low rates, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry Outperforms Sector and S&P 500

The Zacks Major Regional Banks industry has outperformed the S&P 500 composite and its own sector over the past year.

While the stocks in this industry have collectively surged 74.4% over this period, the Zacks S&P 500 composite has gained 46.8% and Zacks Finance sector has rallied 54.4%.

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 2.32X. This compares with the highest level of 2.68X, lowest of 1.21X and median of 2.13X over the past five years. Additionally, 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 20.63X.

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. But a comparison of the group’s P/TBV ratio with that of the broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TBV came in at 3.81X. This is above the Zacks Major Regional Banks industry’s ratio, as the chart below shows.

3 Major Regional Bank Stocks to Buy Now

JPMorgan: The largest U.S. bank (in terms of assets), JPMorgan has operations in more than 60 countries. The bank is expanding its footprint in new regions and aims to enter 15-20 new markets by opening roughly 400 new branches by 2022-end. Apart from enhancing market share, the strategy will help the bank grab cross-selling opportunities by increasing its presence in the card and auto loan sectors.

Also, this Zacks Rank #1 (Strong Buy) bank is taking measures to further diversify operations. While JPMorgan is too big to be allowed to acquire another bank, it is seeking to make meaningful strategic buyouts in the near future. Also, the bank is planning to launch a digital retail bank in the U.K. in the coming months.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Also, with the Fed approving share repurchases from this year, JPMorgan resumed the same from the first quarter of 2021. The company plans to buy back shares worth $30 billion in 2021, while maintaining a dividend at 90 cents per share for now.

With a market cap of $471.4 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 16.6% and 2% upward for 2021 and 2022, respectively, over the past 30 days.

The stock has gained 23.9% so far this year. The company's long-term (three-five years) projected earnings growth rate of 5% promises rewards for shareholders.

Wells Fargo: With total assets worth $1.96 trillion as of Mar 31, 2021, Wells Fargo 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 through more than 5,000 branches, broad ATMs network, the Internet and other distribution channels across North America and globally.

Though the company has been facing problems related to its 2016 sales scandal, management has been striving hard to overcome this matter. Earlier this year, Wells Fargo was successful in getting the Fed’s approval to its proposal for overhauling risk management and governance. The acceptance is a major step forward for the company in getting the asset cap lifted, which has hampered its growth since 2018.

Additionally, Wells Fargo is focused on reducing its expense base to $53 billion in 2021. The company intends to achieve this by streamlining organizational structure, closing branches (targets to close 250 branches this year), and reducing headcount by optimizing operations and other back-office teams. Such initiatives are likely to support bottom-line growth.

With a market cap of $189.1 billion, Wells Fargo is expected to regain its lost glory with the above-mentioned strategic efforts. Further, analysts are bullish on the stock. Over the past 30 days, the Zacks Consensus Estimate for earnings has been revised 28.9% upward for 2021 and 8% for 2022.

The stock, which currently sports Zacks Rank #1, has gained 52.2% so far this year. The company's long-term (three-five years) projected earnings growth rate of 9.7% promises rewards for shareholders.

KeyCorp: Cleveland, OH-based KeyCorp provides a wide range of products and services, such as commercial and retail banking, commercial leasing, investment management, consumer finance as well as investment banking products in 15 states through a network of more than 1,050 branches.

This Zacks Rank #2 (Buy) company continues to optimize its branch network. Also, as the demand for digital banking services continues to rise, KeyCorp identified approximately 70 branches (or 7% of branches) for consolidation by 2021-end.

Further, KeyCorp’s inorganic expansion efforts are impressive. In March, it acquired data analytics-driven consultancy firm, AQN Strategies LLC. In 2019, the company acquired Laurel Road Bank’s digital lending operation and has further expanded its operation with the launch of Laurel Road for Doctors. The bank is expected to continue making opportunistic acquisitions, which are likely to further help diversify revenues.

Similar to other major regional banks, KeyCorp’s capital distributions were restricted last year. Nonetheless, as some of these restrictions were removed to some extent in December 2020, it announced a new share buyback plan worth up to $900 million shares for the first three quarters of 2021, while maintaining dividend payment at 18.5 cents per share. As of Mar 31, 2021, $765 million worth of buyback authorization remained.

KeyCorp has a market cap of $21.5 billion. Also, analysts are bullish on the stock. Over the past 30 days, the Zacks Consensus Estimate for earnings has moved 13.2% upward for 2021 and 4.8% for 2022.

In the year-to-date period, the stock has rallied 38.4%. The company's long-term (three-five years) projected earnings growth rate of 23% promises substantial rewards for shareholders.

Zacks Top 10 Stocks for 2021

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.


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