The Consumer Price Index rose 6.2% in October from a year earlier, its biggest jump in more than 30 years. But while soaring inflation might not negatively impact all sectors equally, some sectors are actually expected to benefit from it.
Due to their rate-sensitive nature, banks tend to benefit when the Fed tightens its monetary policy as an anti-inflationary measure. When interest rates rise, the income on bank assets like bonds and loans climb higher than their liabilities, primarily their deposits. The Fed will likely raise interest rates soon, which could help banks improve their profits. Furthermore, U.S. bank stocks rose recently when senior bankers and industry experts welcomed Federal Reserve Chair Jerome Powell’s nomination for a second term.
Given this backdrop, we think it could be wise to bet on fundamentally strong bank stocks Wells Fargo & Company (WFC) and U.S. Bancorp (USB). However, JPMorgan Chase & Co. (JPM) and Bank of America Corporation (BAC) do not look well-positioned to see their shares soar in the near term. So, these two stocks are best avoided now.
Stocks to Buy:
Wells Fargo & Company (WFC)
WFC provides a diversified set of banking, consumer and commercial finance, investment, and mortgage products and services. It operates through four segments: consumer lending; commercial banking; corporate and investment banking; and wealth and investment management.
On November 8, 2021, WFC announced that it is offering Black Knight’s Servicing Digital solution to its mortgage customers. Joe Nackashi, the President of Black Knight, said, “We are pleased to expand our relationship with Wells Fargo further and deliver solutions that can bring tremendous value to its customer base.”
For its fiscal third quarter, ended September 30, 2021, WFC’s net income increased 59.2% year-over-year to $5.12 billion. The company’s EPS increased 67.1% year-over-year to $1.17. Also, its average deposits increased 4% year-over-year to $1.45 trillion.
Analysts expect WFC’s EPS and revenues for its fiscal year 2021 to increase 1,036.6% and 5.2%, respectively, year-over-year to $4.66 and $76.12 billion It surpassed the Street’s EPS estimates in each of the trailing four quarters. The stock has gained 58.3% year-to-date.
WFC’s POWR Ratings reflect solid prospects. The company has an overall B rating, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.
It has a B grade for Growth, Momentum, and Sentiment. It is ranked #1 of 11 stocks in the Money Center Banks industry. Click here to check the additional ratings of WFC for Value, Stability and Quality.
U.S. Bancorp (USB)
Financial services holding company USB provides various financial services. Its segments include Corporate and Commercial Banking; Consumer and Business Banking; Wealth Management and Investment Services; Payment Services; and Treasury and Corporate Support segments.
On September 21, USB entered an agreement to acquire MUFG Union Bank’s core regional banking franchise for approximately $8 billion. This deal is expected to add more than one million consumer customers and 190,000 small business customers to the company’s portfolio.
USB’s net income increased 28.3% year-over-year to $2 billion for its fiscal third quarter, ended September 30, 2021. The company’s average total deposits increased 6.4% year-over-year to $26 billion. In addition, its EPS increased 31.3% year-over-year to $1.30.
For fiscal year 2021, USB’s EPS is expected to increase 68.3% year-over-year to $5.15. Its revenues for fiscal 2022 are expected to increase 10.6% year-over-year to $25.30 billion. Also, it surpassed the consensus EPS estimates in three of the trailing four quarters. On a year-to-date basis, the stock has gained 18.8% in price.
USB’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which translates to a Buy in our proprietary rating system.
Stocks to Avoid:
JPMorgan Chase & Co. (JPM)
JPM is a financial holding company that does business in investment banking, financial services, and asset management. It operates in the consumer and community bank; corporate and investment bank; commercial and asset management segments.
On November 23, 2021, JPM CEO Jamie Dimon said, “I made a joke the other day that the Communist Party is celebrating its 100th year – so is JPMorgan. I’d make a bet that we last longer.” Such comments usually do not bode well for foreign companies in China as they are often subject to a backlash.
For its fiscal third quarter ended September 30, 2021, JPM’s net revenue for its Consumer & Community Banking (CCB) segment decreased 3% year-over-year to $12.52 billion. The company’s noninterest expense for the CCB segment increased 5% year-over-year to $7.23 billion. And its net loss for the corporate segment increased 16.9% year-over-year to $817 million.
Analysts expect JPM’s EPS for the quarter ending March 31, 2022, to decrease 34.2% year-over-year to $2.96. The company’s revenues for the quarter ending December 31, 2021, are expected to decline 1.9% year-over-year to $29.57 billion. The stock has declined 6.5% in price over the past month.
JPM’s POWR Ratings reflect bleak prospects. It has a D grade for Growth. Click here to check the other ratings of JPM for Quality, Value, Momentum, Stability, and Sentiment.
Bank of America Corporation (BAC)
BAC is a financial institution that serves various individual customers, small- and middle-market businesses, institutional investors, government, and corporations. It provides a range of banking, investing, asset management, and other financial and risk management products and services.
For the fiscal third quarter, ended September 30, 2021, BAC’s average loans and leases for the consumer banking segment declined 11.7% year-over-year to $281.40 billion. The company’s noninterest expense for its Global Wealth & Investment Management segment increased 6% year-over-year to $3.74 billion. Also, its average loans and leases for the Global Banking segment declined 13% year-over-year to $324.70 billion.
For the quarter ending March 31, 2022, BAC’s EPS is expected to decline 10.5% year-over-year to $0.77. The stock has declined 6.9% in price over the past month.
BAC’s weak fundamentals are reflected in its POWR Ratings. It has a D grade for Value. Also, it is ranked #8 in the Money Money Center Banks industry. To check the other ratings of BAC for Growth, Stability, Quality, Momentum, and Sentiment, click here.
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JPM shares rose $2.32 (+1.46%) in premarket trading Wednesday. Year-to-date, JPM has gained 29.68%, versus a 24.62% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...
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