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

Having weathered numerous challenges that tumultuously affected bank stocks earlier this year, is the coast clear to dive into this sector? Unfortunately, the answer is not so straightforward. With the uncertainties looming, let’s examine the current landscape of the U.S. banking industry and discuss the investment appeal of bank stocks Bank of America (BAC) and JP Morgan Chase (JPM). Read on….

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….