Exploring the Investment Appeal of JPMorgan (JPM) and Bank of America (BAC)

The banking sector has demonstrated enviable resilience and stability despite the challenges faced since the year’s beginning. Even though the U.S. banking platform remains stable, escalating macroeconomic uncertainties present potential threats to some institutions, specifically through potential liquidity crunch and future capital deficits. Given this backdrop, waiting for better entry points in stocks such as Bank of America Corporation (BAC) and JPMorgan Chase & Co. (JPM) could be prudent.

After riding the storm incited by the regional bank collapses and credit downgrades, the banking sector demonstrated stabilization. This recovery aligned with the Fed's move to raise the benchmark interest rate to its highest level in over two decades – an action anticipated to reverse next year due to planned rate cuts. Higher interest rates often spell benefits for banks, mainly through elevated net interest income.

Nevertheless, the banking industry is wrestling with decelerating loan growth, an uptick in unrealized bond losses, default risks linked to commercial real estate (CRE) loans, soaring capital requirements, and the overall worsening of the macroeconomic environment.

Credit card debt soared to unprecedented heights in the third quarter, climbing nearly 5% compared to the previous quarter and pushing a burgeoning percentage of borrowers towards late payments.

With October’s inflation eased to 3.2% and the slower-than-expected job growth in October, there is strengthened market conjecture that the Fed will begin to cut rates next year. Such a move would assuage banks' concerns over deposit costs, loan growth, and credit quality.

Fed’s policy decisions hinge on incoming macro data even amid signs that the Fed is realizing a smooth economic slowdown. Minutes from a recent Fed meeting suggest a need for ongoing restrictive fiscal policy due to worries about stubborn inflation.

The Fed has maintained its cautious approach, showing minimal interest in imminent rate cuts. Therefore, rates could remain elevated for an extended period. Although high-interest rates generally enhance banks' net interest income, they could hamper loan growth as borrowing becomes costly and deposit costs could increase.

Furthermore, concerns over the high-interest rate environment may further destabilize the U.S. banking sector’s operating climate, potentially driving additional rating downgrades. Such a shift could presage increased borrowing costs and the implementation of more stringent lending standards.

Considering these factors, let's look at the fundamentals of the two Money Center Banks stocks.

Stock #2: 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.

BAC’s forward non-GAAP P/E of 8.88x is 8.1% lower than the 9.67x industry average. Its forward Price/Book of 0.92x is 16.2% lower than the 1.10x industry average. However, its forward non-GAAP PEG of 1.59x is 21.8% higher than the 1.30x industry average.

For the third quarter that ended September 30, 2023, BAC’s total revenue, net of interest expense, increased 2.7% year-over-year to $25.17 billion. Its net income applicable to common stockholders rose 10.5% year-over-year to $7.27 billion.

Additionally, its EPS came at $0.90, representing an increase of 11.1% year-over-year. Also, its net interest income rose 4.5% over the prior-year quarter to $14.38 billion. In addition, its CET1 ratio came at 11.9%, compared to 11% in the year-ago quarter.

Street expects BAC’s revenue and EPS for fiscal 2023 to increase 6.4% and 7.7% year-over-year to $101.03 billion and $3.44, respectively. However, for the fiscal fourth quarter ending December 2023, its revenue and EPS are expected to decline 1% and 12.8% year-over-year to $24.30 billion and $0.74, respectively. It surpassed the consensus revenue and EPS estimates in each of the trailing four quarters.

Over the past year, the stock has declined 6.4% to close the last trading session at $30.66. However, it gained 9% over the past three months. The stock is trading above its 50-day and 200-day moving averages of $27.91 and $28.98, respectively, indicating an uptrend.

Institutions hold roughly 69.9% of BAC shares. Of the 2,775 institutional holders, 1,151 have increased their positions in the stock. Moreover, 147 institutions have taken new positions (37,372,100 shares).

BAC’s uncertain outlook is reflected in its POWR Ratings. It has an overall rating of C, translating to Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

BAC has a C grade for Value, Stability, Sentiment, and Quality. Within the Money Center Banks industry, it is ranked #3 out of 9 stocks.

Beyond what we’ve stated above, we have also rated the stock for Growth and Momentum. Get all ratings of BAC here.

Stock #1: 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).

JPM’s forward non-GAAP P/E of 9.31x is 3.7% lower than the 9.67x industry average. However, its forward Price/Book of 1.52x is 38.6% higher than the 1.10x industry average.

JPM’s total net revenue for the fiscal third quarter that ended September 30, 2023, increased 21.9% year-over-year to $39.87 billion. Its net income rose 35.1% year-over-year to $13.15 billion. In addition, its EPS came in at $4.33, representing an increase of 38.8% year-over-year.

Its return on common equity (ROE) was 18%, compared to 15% in the year-ago period. Also, its CET1 ratio was 14.3%, compared to 12.5% in the prior-year quarter.

Analysts expect JPM’s revenue and EPS for the fourth quarter ending December 2023, to increase 14.6% and 3.7% year-over-year to $39.59 billion and $3.70, respectively. It surpassed the consensus revenue and EPS estimates in each of the trailing four quarters.

Over the past year, the stock has gained 19.2% to close the last trading session at $156.79. It has gained 9.1% over the past three months. The stock is trading above its 50-day and 200-day moving averages of $147.14 and $143.23, respectively.

Institutions hold roughly 70.7% of JPM shares. Of the 3,808 institutional holders, 1,739 have increased their positions in the stock. Moreover, 158 institutions have taken new positions (9,197,266 shares).

JPM’s POWR Ratings reflect its prospects. The stock has an overall C rating, equating to Neutral in our proprietary rating system.

It has a C grade for Growth, Value, Momentum, Stability, and Quality. It is ranked #2 within the same industry.

Click here to see the JPM’s additional ratings (Sentiment).

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JPM shares were unchanged in premarket trading Friday. Year-to-date, JPM has gained 20.41%, versus a 21.15% rise in the benchmark S&P 500 index during the same period.

The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.

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