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Zacks Industry Outlook Highlights JPMorgan Chase, Bank of America and Citigroup
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For Immediate Release
Chicago, IL – December 19, 2022 – Today, Zacks Equity Research discusses JPMorgan Chase & Co. (JPM - Free Report) , Bank of America Corp. (BAC - Free Report) and Citigroup Inc. (C - Free Report) .
The Zacks Major Regional Banks industry, which bore the brunt of near-zero interest rates and muted lending scenario since the beginning of 2020, is expected to continue benefiting from the Federal Reserve's aggressive interest rate hikes. This, along with modest loan demand, will aid banks' net interest margin and net interest income.
While the macroeconomic ambiguity is resulting in higher credit costs for major banks and rising recession fears, restructuring/expansion efforts and digitization will provide support. Hence, JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. will gain from these favorable industry trends.
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 Factors Shaping the Future of the Major Regional Banks Industry
Hawkish Fed & Decent Loan Demand: Major regional banks thrive in the higher interest rate regime. So, the Fed's aggressive monetary policy to curb inflation will support banks' NII. It must be noted that banks have been reeling under near-zero interest rates since March 2020, which adversely impacted net interest margin (NIM) and NII. With the central bank officials expecting the Fed Funds target rate to reach 5.1% by the end of 2023, banks will continue to reap benefits with higher NIM and NII going forward. This, along with decent loan demand, will support banks' top-line growth.
Business Restructuring Initiatives: Major regional banks are taking several strategic steps to expand into new avenues and lower their dependence on spread income. 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.
Major regional banks are also aggressively expanding their footprint outside the United States and into the U.K. and China. Banks are re-evaluating their business structure to improve operating efficiency. The main goal is to simplify operations and do away with non-core, unprofitable ones.
Asset Quality Metrics Touching 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 coronavirus mayhem. This considerably hurt their financials. Nonetheless, with solid economic growth and support from the government stimulus packages, banks began to release these reserves back into the income statement.
Yet, given the present macroeconomic and geopolitical headwinds, and rise in loan demand, major regional banks 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.
Near-Term Recession Risk: The Fed's aggressive monetary policy has intensified fears of a "mild" recession in 2023. Even the Fed's latest Summary of Economic Projections indicates the U.S. economy will slow down considerably over the next year, with just 0.5% growth. While major regional banks are better equipped to face economic downturn owing to the reforms introduced subsequent to the 2008 financial crisis, the lending scenario is likely to turn weak as demand for loans gradually wanes.
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 #99, which places it in the top 40% of nearly 245 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 outperform 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. Since January 2022-end, the industry's earnings estimates for the current year have been revised almost 1% upward.
Before we present a few major bank stocks that you may watch on rising interest rates and other favorable developments, 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 both the S&P 500 composite and its own sector over the past two years. While the stocks in this industry have collectively gained 9.9% over the period, the Zacks S&P 500 composite has rallied 6% and the Zacks Finance sector has risen 7.9%.
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 1.86X. This compares with the highest level of 2.68X, lowest of 1.21X, and median of 2.14X 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 10.20X.
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 solid discount. The Zacks Finance sector's trailing 12-month P/TBV came in at 4.61X. This is above the Zacks Major Regional Banks industry's ratio.
3 Major Regional Banks to Keep an Eye On
JPMorgan: The largest U.S. bank (in terms of assets), JPMorgan has operations in more than 60 countries. The company is expected to greatly benefit from the higher interest rate environment. Given the ultra-hawkish monetary policy stance and solid loan demand, the company is projecting NII (managed basis) to be approximately $66 billion in 2022 and $74 billion in 2023.
This Zacks Rank #3 (Hold) bank is also taking measures to further diversify operations. In September 2022, the company announced a deal to acquire Renovite, while this January, it agreed to buy a 49% stake in Viva Wallet. In August, the company completed the deal to buy Global Shares. These, along with several others, are expected to keep supporting the bank's plan to diversify revenues and expand the fee income product suite and consumer bank digitally.
Also, JPM is expanding its footprint in new regions, having already added more than 230 new branches (of the targeted 400 new branches) and has a presence in 48 of 50 U.S. states. 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. Apart from this, the company launched its digital retail bank Chase in the U.K. in 2021 and continues to expand investment banking and asset management operations in China.
JPMorgan has a solid capital deployment plan. Following the clearance of 2022 stress test, the bank kept the quarterly dividend unchanged at $1 per share. Also, to maintain higher future capital requirements amid macroeconomic challenges, the company has temporarily suspended share repurchases. Driven by a strong capital position and earnings strength, the company is expected to sustain current capital deployments.
With a market cap of $391.3 billion, JPMorgan is expected to continue benefiting from its scale and business expansion efforts and higher rates. Also, analysts are bullish on the stock. The Zacks Consensus Estimate for earnings has moved marginally upward for 2022 over the past 30 days. The stock has lost 15.8% so far this year.
Bank of America: With total assets worth $3.07 trillion as of Sep 30, 2022, 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 immensely from higher interest rates. The company's balance sheet is highly asset-sensitive, and rising rates will support top-line growth. Provided that loans grow modestly and rates in the forward curve materialize, management projects NII in the fourth quarter of 2022 to rise by at least $1.25 billion sequentially.
Bank of America continues to align its banking center network according to customer needs. 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. The acquisition of Axia Technologies has further strengthened its healthcare payments business.
Prudent cost management continues to support this Zacks Rank #3 bank's financials. Its expense-saving plan – Project New BAC (launched in 2011) – helped improve overall efficiency. Over the last several quarters, the company has incurred an average of $15 billion in expenses, despite undertaking strategic growth initiatives. Though total non-interest expenses rose 8.2% in 2021, management expects the same for 2022 to be relatively stable.
Post the clearance of the 2022 stress test, Bank of America announced a dividend hike of 4.8% in July 2022, following a 17% hike in July 2021. In October 2021, the company's share repurchase plan of $25 billion was renewed. As of Sep 30, 2022, $15.95 billion worth of shares were left to be repurchased.
With a market cap of $259 billion, Bank of America's efforts to improve revenues, strong balance sheet and expansion into new markets will support financials. Over the past month, the Zacks Consensus Estimate for earnings has been revised marginally lower for 2022. Shares of BAC have declined 27.4% so far this year.
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 benefit from an improvement in the interest-rate scenario following the rate hikes and steady loan growth. For the fourth quarter of 2022, management anticipates NII (excluding markets) to be up in the range of $1.5-$1.8 billion.
This Zacks Rank #3 company continues to increase its fee-based business mix and shrink non-core assets. It has been emphasizing growth in core businesses through streamlining operations internationally. The bank has said that it will wind down its China, Russia, South Korea and U.K. consumer banking business while expanding personal banking and wealth management businesses.
In January 2022, the bank revealed plans to exit the consumer, small business and middle-market banking operations in Mexico. This is in addition to its major strategic action announced in April 2021 to exit the consumer banking business in 13 markets across Asia and EMEA, including Australia, Bahrain, China, India, Indonesia and Korea.
Since then, Citigroup has signed deals to sell consumer businesses in Indonesia, Taiwan, Vietnam and India. It has also completed the sale of the Bahrain, Malaysia, Thailand, Australia and Philippines consumer businesses. 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 will likely help augment the company's profitability and efficiency over the long term.
Citigroup has a market cap of $89.1 billion. A diverse business model, focus on core operations and streamlining of international businesses will keep supporting the company's prospects. Over the past 30 days, the Zacks Consensus Estimate for earnings has remained unchanged for 2022. In the year-to-date period, the stock has declined 23.9%.
Why Haven't You Looked at Zacks' Top Stocks?
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Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
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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Zacks Industry Outlook Highlights JPMorgan Chase, Bank of America and Citigroup
For Immediate Release
Chicago, IL – December 19, 2022 – Today, Zacks Equity Research discusses JPMorgan Chase & Co. (JPM - Free Report) , Bank of America Corp. (BAC - Free Report) and Citigroup Inc. (C - Free Report) .
Industry: Regional Banks
Link: https://www.zacks.com/commentary/2029424/3-major-regional-banks-worth-a-look-despite-recession-risk
The Zacks Major Regional Banks industry, which bore the brunt of near-zero interest rates and muted lending scenario since the beginning of 2020, is expected to continue benefiting from the Federal Reserve's aggressive interest rate hikes. This, along with modest loan demand, will aid banks' net interest margin and net interest income.
While the macroeconomic ambiguity is resulting in higher credit costs for major banks and rising recession fears, restructuring/expansion efforts and digitization will provide support. Hence, JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. will gain from these favorable industry trends.
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 Factors Shaping the Future of the Major Regional Banks Industry
Hawkish Fed & Decent Loan Demand: Major regional banks thrive in the higher interest rate regime. So, the Fed's aggressive monetary policy to curb inflation will support banks' NII. It must be noted that banks have been reeling under near-zero interest rates since March 2020, which adversely impacted net interest margin (NIM) and NII. With the central bank officials expecting the Fed Funds target rate to reach 5.1% by the end of 2023, banks will continue to reap benefits with higher NIM and NII going forward. This, along with decent loan demand, will support banks' top-line growth.
Business Restructuring Initiatives: Major regional banks are taking several strategic steps to expand into new avenues and lower their dependence on spread income. 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.
Major regional banks are also aggressively expanding their footprint outside the United States and into the U.K. and China. Banks are re-evaluating their business structure to improve operating efficiency. The main goal is to simplify operations and do away with non-core, unprofitable ones.
Asset Quality Metrics Touching 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 coronavirus mayhem. This considerably hurt their financials. Nonetheless, with solid economic growth and support from the government stimulus packages, banks began to release these reserves back into the income statement.
Yet, given the present macroeconomic and geopolitical headwinds, and rise in loan demand, major regional banks 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.
Near-Term Recession Risk: The Fed's aggressive monetary policy has intensified fears of a "mild" recession in 2023. Even the Fed's latest Summary of Economic Projections indicates the U.S. economy will slow down considerably over the next year, with just 0.5% growth. While major regional banks are better equipped to face economic downturn owing to the reforms introduced subsequent to the 2008 financial crisis, the lending scenario is likely to turn weak as demand for loans gradually wanes.
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 #99, which places it in the top 40% of nearly 245 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 outperform 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. Since January 2022-end, the industry's earnings estimates for the current year have been revised almost 1% upward.
Before we present a few major bank stocks that you may watch on rising interest rates and other favorable developments, 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 both the S&P 500 composite and its own sector over the past two years. While the stocks in this industry have collectively gained 9.9% over the period, the Zacks S&P 500 composite has rallied 6% and the Zacks Finance sector has risen 7.9%.
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 1.86X. This compares with the highest level of 2.68X, lowest of 1.21X, and median of 2.14X 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 10.20X.
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 solid discount. The Zacks Finance sector's trailing 12-month P/TBV came in at 4.61X. This is above the Zacks Major Regional Banks industry's ratio.
3 Major Regional Banks to Keep an Eye On
JPMorgan: The largest U.S. bank (in terms of assets), JPMorgan has operations in more than 60 countries. The company is expected to greatly benefit from the higher interest rate environment. Given the ultra-hawkish monetary policy stance and solid loan demand, the company is projecting NII (managed basis) to be approximately $66 billion in 2022 and $74 billion in 2023.
This Zacks Rank #3 (Hold) bank is also taking measures to further diversify operations. In September 2022, the company announced a deal to acquire Renovite, while this January, it agreed to buy a 49% stake in Viva Wallet. In August, the company completed the deal to buy Global Shares. These, along with several others, are expected to keep supporting the bank's 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 (Strong Buy) stocks here.
Also, JPM is expanding its footprint in new regions, having already added more than 230 new branches (of the targeted 400 new branches) and has a presence in 48 of 50 U.S. states. 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. Apart from this, the company launched its digital retail bank Chase in the U.K. in 2021 and continues to expand investment banking and asset management operations in China.
JPMorgan has a solid capital deployment plan. Following the clearance of 2022 stress test, the bank kept the quarterly dividend unchanged at $1 per share. Also, to maintain higher future capital requirements amid macroeconomic challenges, the company has temporarily suspended share repurchases. Driven by a strong capital position and earnings strength, the company is expected to sustain current capital deployments.
With a market cap of $391.3 billion, JPMorgan is expected to continue benefiting from its scale and business expansion efforts and higher rates. Also, analysts are bullish on the stock. The Zacks Consensus Estimate for earnings has moved marginally upward for 2022 over the past 30 days. The stock has lost 15.8% so far this year.
Bank of America: With total assets worth $3.07 trillion as of Sep 30, 2022, 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 immensely from higher interest rates. The company's balance sheet is highly asset-sensitive, and rising rates will support top-line growth. Provided that loans grow modestly and rates in the forward curve materialize, management projects NII in the fourth quarter of 2022 to rise by at least $1.25 billion sequentially.
Bank of America continues to align its banking center network according to customer needs. 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. The acquisition of Axia Technologies has further strengthened its healthcare payments business.
Prudent cost management continues to support this Zacks Rank #3 bank's financials. Its expense-saving plan – Project New BAC (launched in 2011) – helped improve overall efficiency. Over the last several quarters, the company has incurred an average of $15 billion in expenses, despite undertaking strategic growth initiatives. Though total non-interest expenses rose 8.2% in 2021, management expects the same for 2022 to be relatively stable.
Post the clearance of the 2022 stress test, Bank of America announced a dividend hike of 4.8% in July 2022, following a 17% hike in July 2021. In October 2021, the company's share repurchase plan of $25 billion was renewed. As of Sep 30, 2022, $15.95 billion worth of shares were left to be repurchased.
With a market cap of $259 billion, Bank of America's efforts to improve revenues, strong balance sheet and expansion into new markets will support financials. Over the past month, the Zacks Consensus Estimate for earnings has been revised marginally lower for 2022. Shares of BAC have declined 27.4% so far this year.
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 benefit from an improvement in the interest-rate scenario following the rate hikes and steady loan growth. For the fourth quarter of 2022, management anticipates NII (excluding markets) to be up in the range of $1.5-$1.8 billion.
This Zacks Rank #3 company continues to increase its fee-based business mix and shrink non-core assets. It has been emphasizing growth in core businesses through streamlining operations internationally. The bank has said that it will wind down its China, Russia, South Korea and U.K. consumer banking business while expanding personal banking and wealth management businesses.
In January 2022, the bank revealed plans to exit the consumer, small business and middle-market banking operations in Mexico. This is in addition to its major strategic action announced in April 2021 to exit the consumer banking business in 13 markets across Asia and EMEA, including Australia, Bahrain, China, India, Indonesia and Korea.
Since then, Citigroup has signed deals to sell consumer businesses in Indonesia, Taiwan, Vietnam and India. It has also completed the sale of the Bahrain, Malaysia, Thailand, Australia and Philippines consumer businesses. 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 will likely help augment the company's profitability and efficiency over the long term.
Citigroup has a market cap of $89.1 billion. A diverse business model, focus on core operations and streamlining of international businesses will keep supporting the company's prospects. Over the past 30 days, the Zacks Consensus Estimate for earnings has remained unchanged for 2022. In the year-to-date period, the stock has declined 23.9%.
Why Haven't You Looked at Zacks' Top Stocks?
Our 5 best-performing strategies have blown away the S&P's impressive +28.8% gain in 2021. Amazingly, they soared +40.3%, +48.2%, +67.6%, +94.4%, and +95.3%. Today you can access their live picks without cost or obligation.
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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.