The banking sector witnessed a free fall in March as the coronavirus hit the economy fast and hard. This was primarily due to all the potential loan losses that banks were facing when unemployment skyrocketed and gross domestic product dipped, making it difficult for borrowers to cover their outstanding debt. Consequently, financial sector profits nosedived early in the pandemic.
In addition to the pandemic, the Federal Reserve’s dovish monetary policy, promising to keep interest rates low for the foreseeable future, has significantly hurt the banking sector. This is evident from the SPDR S&P Bank ETF’s (KBE) year-to-date loss of 17.8%.
While the financial sector is not out of the woods yet, there has been rising optimism among investors. KBE’s 20.7% return over the past month reflects a solid short-term bullishness as bank stocks have already rallied higher in recent sessions due to the positive vaccine news. The promising vaccine trial data not only triggered a big increase in their share prices, but also helped push long-term interest rates higher.
Investment banking group, Jefferies has recently lifted its rating for the financial sector to “bullish” from “modestly bullish.” The company believes that while soaring COVID-19 infections and the absence of new stimulus “is likely to lead to some weaker economic data and potentially higher impairment charges,” vaccine hopes, easier lending conditions, inflation, and a value rotation will boost bank stocks throughout 2021.
Banks have so far set aside massive provisions for loan losses, and that serves as a “huge safety cushion” as the economy continues to recover. Revenues are trending higher and loss provision costs are falling. Regulators have prevented large banks from buying back stock and increasing their dividends till the end of the year. As soon as these limitations are lifted, bank stocks could soar to unprecedented highs.
Steady economic growth will drive lending activity, which bodes well for financial companies. JPMorgan Chase & Co. (JPM), PNC Financial Services Group, Inc. (PNC), First Republic Bank (FRC), and Comerica Incorporated (CMA) are the best bank stocks to buy to play the economic recovery.
JP Morgan Chase & Co. (JPM)
JPM is a leading global financial services firm with assets of $3.2 trillion and operations in over 60 countries worldwide. The firm is a leader in investment banking, commercial banking, and asset management. It operates under four segments – Consumer & Community Banking (CCB), Corporate & Investment Bank (CIB), Commercial Banking (CB), and Asset & Wealth Management (AWM).
In the last reported third quarter, JPM posted managed revenue of $29.9 billion, primarily driven by a 21% year-over-year rise in the CIB sector. The company set aside $611 million as provision for credit losses to maintain its credit reserves at $34 billion. While average loans were up 1%, average deposits surged 30% year-over-year. EPS for the quarter came in $2.92, rising 9% compared to the year-ago quarter.
JPM is benefiting from its strong capital and liquidity position. The company paid a dividend of $0.9 in the previous quarter, aggregating to a dividend yield of 3.12%. JPM’s client driven business model and footprint expansion have allowed it to capture significant market share in several operations. Hence, analysts expect EPS to grow 21.9% next year.
JPM has lost 17.1% so far this year to end yesterday’s trading session at $115.46. However, the stock is up more than 15% in the past month, and is presently trading 18.2% below its 52-week high of $141.10.
How does JPM stack up for POWR Ratings?
A for Trade Grade
A for Peer Grade
B for Overall POWR Rating.
It is ranked #2 in the 10-stock Money Center Banks industry.
PNC Financial Services Group, Inc. (PNC)
PNC is one of the largest diversified financial services institutions in the United States. It operates through six segments: Retail Banking, Corporate & Institutional Banking, Asset Management Group, Residential Mortgage Banking, BlackRock, and Non-Strategic Assets Portfolio.
PNC has recently signed a definitive agreement to acquire BBVA USA Bancshares, Inc., the US banking subsidiary of Spanish financial group, Banco Bilbao Vizcaya Argentaria, S.A. (BBVA), for a purchase price of $11.6 billion.
PNC reported total revenue of $4.3 billion in the third quarter, increasing $205 million, or 5% year-over-year. While average loans decreased $15 billion, or 6% during the quarter, average deposits increased $15.3 billion, or 5% year-over-year, to $350.5 billion, due to growth in both commercial and consumer deposits. Provision for credit losses was $52 million, rising to $3.43 billion so far this year. EPS for the quarter came in $2.92, rising 9%, compared to the year-ago quarter.
The company declared a dividend of $1.15 per share for the last quarter, cumulating to an annual dividend of $4.60, yielding 3.56%. PNC continued to generate positive operating leverage this year. Hence, analysts expect PNC’s current year EPS to grow 42.1% year-over-year.
PNC lost 18.4% year-to-date to close yesterday’s trading session at $130.30. However, the stock is up nearly 18.5% in the past month, and is currently trading at a 19.5% discount from its all-time high of $161.79.
PNC’s momentum is reflected in its POWR Ratings. It has a “Buy” rating with an “A” in Trade Grade, and “B” in Peer Grade. Within the Money Center Banks industry, it’s ranked #3 out of 10 stocks.
First Republic Bank (FRC)
FRC provides private banking, private business banking, real estate lending, and wealth management services to clients in metropolitan areas in the United States. It operates through two segments – Commercial Banking and Wealth Management.
First Republic Investment Management, a subsidiary of FRC, recently announced that its First Republic Founders Index outperformed the S&P 500 by 46% during its first year. Moreover, in order to improve its liquidity, FRC has recently announced a follow-up offering worth $198.3 million of its common share. The company also issued a $500 million-worth Series K preferred stock offering in September.
The company reported impressive third quarter results, delivering $1 billion as revenues. This implied a 19.6% year-over-year growth as lending, deposits, and wealth management all continued to grow strongly. Loan originations were $12.2 billion for the quarter, up 11.6% from the year-ago quarter. Total deposits increased to $104.4 billion, up 21.8% year-over-year. The provision for credit losses for the quarter was $28.5 million, cumulating to $122 million so far this year. EPS for the quarter came in at $1.61, rising 22.9% year-over-year.
Checking deposit balances were 64.8% of total deposits at the end of the quarter. The company also declared a quarterly dividend of $0.20, which translates into a dividend yield of 0.6%. FRC stands out for its deposit franchise, ability to safely grow its loan book, and service model, resulting in excellent customer retention. Hence, the street expects the company’s EPS to grow 9% per annum over the next five years.
FRC closed yesterday’s trading session at $132.24, gaining 12.6% year-to-date. Moreover, the stock has gained more than 5% over the past month. FRC has recently hit its 52-week high of $142.14 and is presently trading just 7% below it.
It’s no surprise that FRC is rated “Strong Buy” in our POWR Ratings system. It also has an “A” for Trade Grade, Buy & Hold Grade, and Peer Grade. It is ranked #1 out of 10 Money Center Banks stocks.
Comerica Incorporated (CMA)
CMA provides various financial products and services, and operates through three major segments – the Commercial Bank, the Retail Bank and Wealth Management. The Finance Division is also reported as a segment. The bank reported total assets of $83.6 billion at the end of third quarter.
CMA recently announced the August data for its Texas Economic Activity Index. August’s index reading increased 21 points, or 22%, above the index cyclical low of 95.5 to 116.1, indicating a recovering economic path. Moreover, the bank teamed up with the Local Initiatives Support Corporation (LISC) last month to expand access to capital for small businesses and nonprofits.
Net interest income for the third quarter came in at $458 million. Deposits increased $4.5 billion, or 7% year-over-year, to $68.8 billion as customers continued to conserve cash. Moreover, loans decreased $1.5 billion, or 3%, to $52.0 billion and the company made $5 million as provision for credit losses. EPS for the quarter came in at $1.44, rising 80% sequentially.
The company returned $94 million back to its shareholders through dividends during the quarter. The current annual dividend of $2.72 translates into a yield of 5.35%. CMA is committing to help small businesses and communities to make its relationship-focused business model more resilient. Hence, analysts estimate EPS to grow 36.4% next year.
CMA has lost 29% so far this year to end yesterday’s trading session at $50.93. However, the stock has gained nearly 23.6% in the past month and is presently trading at 30.6% discount from its 52-week high of $73.43.
In our POWR Ratings, the company has been accorded an “B” for Trade Grade. Out of 10 stocks in the Money Center Banks industry, CMA is rated #4.
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JPM shares were trading at $114.42 per share on Friday afternoon, down $1.14 (-0.99%). Year-to-date, JPM has declined -14.94%, versus a 12.47% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
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