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Zacks Industry Outlook Highlights: JPMorgan, Bank of America and Citigroup

Zacks Equity Research
·12 min read

For Immediate Release

Chicago, IL – December 24, 2020 – Today, Zacks Equity Research discusses the Major Regional Banks, including JPMorgan JPM, Bank of America BAC and Citigroup C.

Industry: Major Regional Banks

Link: https://www.zacks.com/commentary/1200055/3-major-regional-bank-stocks-to-watch-amid-coronavirus-woes

The Zacks Major Regional Banks industry is bearing the brunt of low interest rates, economic slowdown and muted consumer sentiments. While the economy is gradually reopening and there has been an increase in demand for loans, rise in coronavirus cases might hamper business activities again.

Nevertheless, business restructuring and expansion initiatives, along with technological investments, are likely to provide considerable support. Further, solid asset quality and sustained economic recovery are likely to be tailwinds. JPMorgan, Bank of America and Citigroup are expected to gain from these positive trends.

Industry Description

The Zacks Major Regional Banks industry includes the nation’s largest banks in terms of assets, with most operating globally. Financial performance of these banks largely depends on the nation’s economic health. As the banks are involved in a number of complex financial activities, they are required to meet the stringent regulations set by the Federal Reserve and other agencies.

In addition to traditional banking services, which are the source of interest income, major regional banks provide a wide range of financial services and products to retail, corporate as well as institutional clients, both domestic and global. These include credit and debit cards, wealth management, as well as investment banking, among others. So, a large source of revenues for these banks comprises fees and commission earned from these services.

4 Trends Shaping the Major Regional Bank Industry

Business Restructuring & Digitization Offer Support: Major regional banks are taking measures to counter fallout from low rates and economic slowdown by restructuring operations and expanding in other avenues. One of the main driving factors is the need for technological advancement.

The banks are investing heavily in AI and other digital platforms, and even partnering/acquiring providers of such services as there has been a significant rise in demand for these amid the coronavirus pandemic. The efforts are expected to improve online and mobile banking services, as well as ward off competition from Fintech and other large tech companies. Further, it will help banks save time and provide less error-prone services, thereby improving operating efficiency.

Asset Quality Show Signs of Improvement: For the major part of 2020, these regional banks build extra provisions to tide over unexpected defaults and payment delays owing to the economic slowdown resulting from coronavirus mayhem. This substantially hurt their bottom-line growth in the first half of the year. However, with gradual economic revival and favorable developments related to COVID-19 vaccine, banks are less likely to continue extra provisioning for bad loans. Further, a government stimulus package is expected to aid banks’ asset quality in the near term.

Share Buybacks Resuming Next Year: Most major regional banks had voluntarily paused share buybacks in March to preserve liquidity amid economic uncertainty. Then in June, the Fed, following the annual stress test, restricted dividend payments and suspended repurchases. Now, subsequent to the second round of stress test, the central bank has permitted these banks to resume buybacks from 2021 (albeit with certain restrictions). Thus, several major banks have come out with their buyback plans, starting first-quarter 2021.

Low Rates Hurt Revenues: Major regional banks substantially benefit from higher interest rates. However, in March, the Fed slashed the interest rates to near zero to support the U.S. economy from coronavirus-related mayhem. Since then, the central bank has been signaling no chance of rate hike, until at least 2023.

Thus, this will continue to hurt the banks’ net interest margin and net interest income to some extent. Additionally, there is less chance that economic growth will revert to pre-crisis level soon. Hence, this will also hurt banks’ financials to some extent.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Major Regional Banks industry is a 15-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #120, which places it in the top 47% of nearly 253 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of encouraging earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since April 2020-end, the industry’s earnings estimates for the current year have been revised by 25.8% upward.

Before we present a few stocks that you may want to keep an eye on for your portfolio despite low rates and economic slowdown, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry Underperforms Sector and S&P 500

The Zacks Major Regional Banks industry has underperformed the S&P 500 composite and its own sector over the past two year.

While the stocks in this industry have collectively gained 14.6% over this period, the Zacks S&P 500 composite surged 59.4% and Zacks Finance sector has rallied 20%.

Industry’s ValuationOne might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TBV), which is commonly used for valuing banks because of large variations in their earnings results from one quarter to the next.

The industry currently has a trailing 12-month P/TBV of 1.80X. This compares with the highest level of 2.68X, lowest of 1.21X and median of 2.11X over the past five years. Additionally, the industry is trading at a discount compared with the market at large, as the trailing 12-month P/TBV for the S&P 500 composite is 16.35X.

As finance stocks typically have a lower P/TBV ratio, comparing major regional banks with the S&P 500 may not make sense to many investors. But a comparison of the group’s P/TBV ratio with that of the broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TBV came in at 3.53X. This is above the Zacks Major Regional Banks industry’s ratio.

3 Major Regional Bank Stocks to Keep a Close Eye on

JPMorgan:The largest U.S. bank (in terms of assets), JPMorgan has operations in more than 60 countries. The bank is expanding its footprint in new regions and aims to enter 15-20 new markets by opening roughly 400 new branches by 2022-end. Apart from enhancing market share, the strategy will help the bank grab cross-selling opportunities by increasing its presence in the card and auto loan sectors.

Also, this Zacks Rank #2 (Buy) bank is taking measures to further diversify operations. While JPMorgan is too big to be allowed to acquire another bank, it is seeking to make meaningful acquisitions in the near future.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Recently at an investors conference, the company CEO Jamie Dimon signaled that the bank is considering buying asset management businesses or financial technology companies to accelerate growth. He said, “So asset management, my line is open. It’s a scaled business. It’s a distribution business. It’s a brand business. It’s got to make sense.”

Also, as the Fed allowed share repurchases from next year, JPMorgan was among the first ones to come out with the authorization. The company plans to buyback shares worth $30 billion in 2021 and maintain a dividend at 90 cents per share for the first quarter.

With a market cap of $370.9 billion, JPMorgan is expected to continue benefiting from its scale and business expansion efforts. Also, analysts are bullish on the stock. The Zacks Consensus Estimate for earnings have moved marginally upward for both 2020 and 2021, over the past seven days.

The stock has gained 28.5% over the past six months. The company's long-term (three-five years) projected earnings growth rate of 5% promises rewards for shareholders.

Bank of America: With total assets worth $2.74 trillion as of Sep 30, 2020, Bank of America is one of the largest financial holding companies in the United States. Incorporated in 1874, it provides a diverse range of banking and non-banking financial services and products.

Bank of America continues to align its banking center network according to the customer needs. The bank is on track to open 500 new centers in new cities and redesign 2,500 centers with technology upgrades by next year. Further, this Zacks Rank #3 (Hold) company plans to add 2,200 more ATMs to its network. These initiatives, along with the success of Zelle and Erica, will enable it to improve digital offerings, and cross sell several products.

Bank of America remains focused on acquiring the industry's best deposit franchise and strengthening the loan portfolio. Despite a tough operating backdrop, deposits and loan balances have remained strong over the past several years. Further, prudent expense management continues to support the company’s financials. While Bank of America has restricted dividend payouts to 18 cents per share and paused buybacks till December-end, it will likely come up with new repurchase authorization for 2021.

With a market cap of $252.7 billion, Bank of America is expected to continue benefiting from its scale and other efforts. Also, analysts are bullish on the stock. Over the past seven days, the Zacks Consensus Estimate for earnings have moved marginally upward for 2020 and remained stable for 2021.

The stock has gained 22.6% over the past six months. The company's long-term (three-five years) projected earnings growth rate of 7% promises rewards for shareholders.

Citigroup:With around 200 million customer accounts in more than 160 countries and jurisdictions, Citigroup is a major global bank. The company has come a long way from the 2008 financial crisis with the help of several business streamlining efforts, with an aim to focus on core businesses.

This Zacks Rank #3 company continues to optimize its branch network, with focus on core urban markets, improving digital channels and reducing branches. Citigroup is also making investment in several areas, including branded credit cards to stoke growth.

Further, prudent cost management will continue supporting the company’s financials. Also, while restricting dividend payments and suspending buybacks this year, the company is expected to resume share repurchases next year following the Fed’s approval for the same.

Citigroup has a market cap of $123.4 billion. Also, analysts are bullish on the stock. Over the past seven days, the Zacks Consensus Estimate for earnings have moved marginally upward for 2020 and remained stable for 2021. Over the past six months, the stock has rallied 16.6%. The company's long-term (three-five years) projected earnings growth rate of 8% promises rewards for shareholders.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performancefor information about the performance numbers displayed in this press release.

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