Bank of America (BAC) and JPMorgan (JPM): Potential Investment Opportunities Ahead?

Last year witnessed major challenges in the banking industry, evidenced by the collapse of several notable U.S. banks and the requirement for Credit Suisse's bailout. Nevertheless, the banking sector is anticipated to stage a significant comeback this year, thanks to the prevailing high-interest rates, moderate consumer spending, and notable technological strides.

Given the optimistic backdrop, it might be a wise move to watch and wait for an entry point in the stocks of two banking giants, JPMorgan Chase & Co. (JPM) and Bank of America Corporation (BAC), for potential gains. But before we delve deeper into the fundamental aspects of these two stocks, let’s take a moment to understand the industry dynamics first.

The banking industry has reaped substantial benefits from the rise in interest rates. In 2022, there was a notable increase in net interest income across many regions, with American and Canadian banks leading the way with an impressive 18% year-over-year surge. Their European counterparts followed closely behind, boasting an 11% year-over-year increase.

Interestingly, though, the revenue in the global investment banking segment of the banking industry plummeted as interest rates in the United States and Europe soared to levels not seen in decades, marked by a rapid escalation in the hiking cycle. Heightened financing costs presented obstacles in funding deals and meeting seller pricing expectations, ultimately resulting in a sluggish pace in Mergers and Acquisition (M&A) activity.

Despite this, major U.S. and European investment banks are anticipated to rebound this year with improved appetite for M&A, buoyed by a growing acceptance among companies of higher interest rates expected to persist over the long term.

Meanwhile, propelled by a resilient job market, solid household financial positions, and a notable increase in consumer confidence in the United States, Fitch Ratings increased its 2024 annual real consumer spending forecast to 1.3%, up from 0.6%. As consumer spending escalates, there's typically a corresponding surge in demand for credit products, presenting banks with lucrative opportunities to bolster their interest income.

Furthermore, technological advancements such as Artificial Intelligence (AI) have rapidly gained prominence within the banking sector, fundamentally transforming numerous facets of banking operations and customer engagements.

Accenture predicts that banks will derive greater benefits from AI compared to other industries, with the potential for productivity to increase by 20% to 30% and revenue to grow by 6%. Additionally, the global AI in the banking market is anticipated to grow at a robust CAGR of 31.7% spanning 2024 to 2032.

Considering the favorable industry outlook, keeping an eye on the shares of JPM and BAC could be advantageous. To that end, let us now dig deeper into the fundamentals of these Money Center Banks stocks, beginning with number two.

Stock #2: JPMorgan Chase & Co. (JPM)

JPM operates as a financial services company worldwide. It operates through four segments: Consumer & Community Banking (CCB); Corporate & Investment Bank (CIB); Commercial Banking (CB); and Asset & Wealth Management (AWM).

On January 31, 2024, JPM paid its shareholders a quarterly dividend of $1.05 per share. The company’s annual dividend of $4.20 translates to a 2.39% yield on the prevailing price level, while its four-year average dividend yield is 2.91%. Its dividend payouts have grown at CAGRs of 4.4% and 8.6% over the past three and five years, respectively. Also, it has a record of nine years of consecutive dividend growth.

JPM’s trailing-12-month net income margin of 33.94% is 44.5% higher than the industry average of 23.48%. Its trailing-12-month Return On Total Assets (ROTA) of 1.28% is 17.8% higher than the 1.09% industry average. Furthermore, the stock’s trailing-12-month cash per share of $106.10 is significantly higher than the $5.98 industry average.

For the fiscal fourth quarter, which ended on December 31, 2023, JPM’s net revenue increased 12.3% from the year-ago value to $39.94 billion, while its Asset Under Management (AUM) rose 24% from the prior-year quarter to $3.40 trillion. In addition, during the same quarter, its net income and EPS came in at $9.31 billion and $3.04, respectively.

The consensus revenue estimate of $41.71 billion for the fiscal 2024 first quarter (ending March 2024) represents an 8.8% improvement year-over-year. Meanwhile, the consensus EPS estimate of $4.23 for the ongoing quarter reflects a 3.2% year-over-year surge. Moreover, the company topped its revenue and EPS estimates in three of the trailing four quarters, which is promising.

The stock has climbed 34.1% over the past nine months to close the last trading session at $179.87.

JPM’s POWR Ratings reflect this sound outlook. It has a B grade for Stability. In the 10-stock Money Center Banks industry, it is ranked #3. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.  

Click here to see JPM’s ratings for Growth, Value, Momentum, Sentiment, and Quality.

Stock #1: Bank of America Corporation (BAC)

BAC provides banking and financial products and services for individual consumers, small and middle-market businesses, institutional investors, large corporations, and governments worldwide. It operates in Consumer Banking; Global Wealth & Investment Management; Banking; and Global Markets segments.

On February 15, 2024, BAC and Starbucks Corporation (SBUX) unveiled a fresh collaboration, providing countless BAC cardholders and Starbucks Rewards® members in the United States with enhanced benefits through account linking. By linking their eligible debit or credit cards, they can earn 2% cash back on qualifying purchases and 1 Star per $2 spent at SBUX.

Shikha Narula, the head of the consumer and small business product strategy, transformation, and rewards at BAC, emphasized that this strategic partnership with SBUX aligns with their dedication to investing in meaningful initiatives to show appreciation to their clients.

On January 31, 2024, BAC declared a quarterly dividend of $0.24 per share, payable to its shareholders on March 29, 2024. The company’s annual dividend of $0.96 translates to a 2.90% yield on the prevailing price level, while its four-year average dividend yield is 2.49%.

Its dividend payouts have grown at CAGRs of 8.5% and 11.2% over the past three and five years, respectively. Also, it has a record of 10 years of consecutive dividend growth.

BAC’s trailing-12-month net income margin of 28.25% is 19.9% higher than the industry average of 23.48%. Furthermore, the stock’s trailing-12-month cash per share of $42.19 is 605.7% higher than the $5.98 industry average.

In the fiscal fourth quarter, which ended on December 31, 2023, BAC’s total revenue net of interest expense amounted to $22 billion. During the same quarter, its adjusted net income and adjusted EPS came in at $5.90 billion and $0.70, respectively. In addition, its cash and cash equivalents stood at $333 billion, up 44.8% compared to $230 billion as of December 31, 2022.

Analysts predict BAC’s revenue and EPS for the fiscal 2024 first quarter (ending March 2024) to come in at $25.14 billion and $0.78, respectively. Furthermore, its EPS is projected to improve by 3.9% annually over the next five years. The company has an impressive surprise history, surpassing its revenue and EPS estimates in three of the trailing four quarters.

BAC’s shares have surged 23.2% over the past nine months to close the last trading session at $34.07.

BAC’s fundamentals are reflected in its POWR Ratings. It has a B grade for Momentum. Within the same industry, it is ranked #2. Click here to see the other ratings of BAC for Growth, Value, Stability, Sentiment, and Quality.  

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JPM shares were trading at $178.86 per share on Friday afternoon, down $1.01 (-0.56%). Year-to-date, JPM has gained 5.80%, versus a 5.62% rise in the benchmark S&P 500 index during the same period.

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