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3 Major Regional Banks to Watch Amid Waning Loans, High Rates

The Zacks Major Regional Banks industry is expected to witness muted NII and NIM performance as funding costs keep rising. Higher interest rates due to the Federal Reserve’s aggressive hikes, which generally benefit the banks, are turning out to be counter-productive. Worsening credit quality, increasing recession risk and a gradual slowdown in loan demand are other key near-term headwinds.

Nonetheless, business restructuring/expansion initiatives and digitization will offer much-needed support. Hence, JPMorgan Chase & Co. JPM, Bank of America Corp. BAC and Citigroup Inc. C are worth taking a look.

About the Industry

The Zacks Major Regional Banks industry includes the nation’s largest banks in terms of assets, with most operating globally. The financial performance of these banks largely depends on the nation’s economic health. As the banks are involved in several complex financial activities, they are required to meet the stringent regulations set by the Federal Reserve and other agencies. Apart from traditional banking services, which are the source of the net interest income (NII), major regional banks provide a wide array of other financial services and products to retail, corporate and institutional clients, both domestic and global. These include credit and debit cards, mortgage banking, wealth management and investment banking, among others. Therefore, a large revenue source for these banks is fees and commissions earned from these services.

Key Themes to Watch in the Major Regional Banks Industry

Hawkish Fed & Pressure on NIM: The Fed’s ultra-aggressive monetary policy over the past year led the rates to reach a 15-year high level of 5-5.25%. The rising interest rates are a boon for major regional banks and they reaped substantial benefits in the form of higher NIM and NII in 2022. But faster rate hikes after a prolonged period of low rates have their fall out, as seen in the past three months with the collapse of Silicon Valley Bank, Signature Bank and First Republic Bank.

While investor sentiments have since turned less bearish on the sector following the decent first-quarter 2023 results, higher rates are now turning out to be a bane for the major regional banks. There is a high chance of another rate hike coming this month on stronger-than-expected GDP numbers, tight labor markets and sticky core inflation. This will result in a further rise in funding costs and major regional banks are less likely to witness much improvement in NII and NIM in the upcoming period.

Waning Loan Demand: The Fed’s aggressive monetary policy has intensified fears of a “mild” recession. Even the Fed’s Summary of Economic Projections announced in March indicates the U.S. economy will slow down considerably this year, with just 0.4% growth. While major regional banks are better equipped to face economic downturn owing to the reforms introduced after the 2008 financial crisis, the lending scenario is likely to weaken as demand for loans gradually wanes.

Asset Quality Metrics Touching Pre-Pandemic Level: For most of 2020, major regional banks built extra provisions to tide over unexpected defaults and payment delays due to the economic downturn resulting from the coronavirus mayhem. This considerably hurt their financials. But with solid economic growth and support from the government stimulus packages, banks began to release these reserves back into the income statement. Yet, given the present macroeconomic headwinds and rise in loan demand, major regional banks are building provisions to counter any adverse fallout. While conservative lending policy and the resilience of borrowers will help keep banks’ asset quality manageable, several credit quality metrics are slowly creeping up toward pre-pandemic levels.

Business Restructuring Initiatives: Major regional banks are taking several strategic actions to expand into new avenues and lower their dependence on spread income. Restructuring of operations is essential for technological advancement and further domestic/global expansion to continue improving profitability. Banks are investing heavily in artificial intelligence and other digital platforms and even partnering/acquiring providers of such services as the demand for these witnessed a substantial rise amid the COVID-19 pandemic. Banks are also aggressively expanding their footprint outside the United States and into the U.K. and China. Banks are re-evaluating their business structure to simplify operations and do away with non-core, unprofitable ones.


Zacks Industry Rank Indicates Bleak Prospects

The Zacks Major Regional Banks industry is a 15-stock group within the broader ZacksFinance sector. The industry currently carries a Zacks Industry Rank #219, which places it in the bottom 12% of more than 245 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 outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of discouraging earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimates for the current year have been revised 7.7% lower.

Before we present a few major bank stocks that you may keep an eye on despite the deteriorating operating environment, 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 widely underperformed both the S&P 500 composite and its own sector over the past two years. While the stocks in this industry have collectively lost 28.6% over the period, the Zacks S&P 500 composite has declined just 0.7% and the Zacks Finance sector has fallen 14.3%.

Two-Year Price Performance

Industry's Valuation

One 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 1.60X. This compares with the highest level of 2.50X, lowest of 1.21X, and median of 2.07X over the past five years. The industry is trading at a huge discount compared with the market at large, as the trailing 12-month P/TBV for the S&P 500 composite is 10.01X, as the chart below shows.

Price-to-Tangible Book Ratio (TTM)


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 solid discount. The Zacks Finance sector’s trailing 12-month P/TBV came in at 4.07X. This is way above the Zacks Major Regional Banks industry’s ratio, as the chart below shows.

Price-to-Tangible Book Ratio (TTM)

3 Major Regional Banks to Keep on the Radar

JPMorgan: The largest U.S. bank (in terms of assets), JPMorgan has operations in more than 60 countries. The company is expected to keep benefiting from higher rates, loan growth, strategic buyouts, business diversification efforts, strong liquidity position and initiatives to expand the branch network in new markets.

In May, JPM took over the failed First Republic Bank for $10.6 billion after almost two months of joint efforts with other lenders to save the flagging institution. The deal added deposits of almost $92 billion, roughly $173 billion of loans and $30 billion of securities to the banking behemoth’s balance sheet. The company expects NII to jump nearly 26% to $84 billion this year.

This Zacks Rank #3 (Hold) lender has been an active acquirer of late. In May, the company acquired Aumni. Last year, it announced a deal to buy Renovite, while acquiring Global Shares and a 49% stake in Greece-based Viva Wallet. These, along with several others, are expected to keep aiding its plan to diversify revenues and expand the fee income product suite and consumer bank digitally.

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

Also, JPM is expanding its footprint in new regions and has a presence in 48 of 50 U.S. states. It intends to further expand its retail branches. The company targets having 70% of the U.S. population (up from the current 60%) within a 10-minute drive to the branch.

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. Apart from this, the company launched its digital retail bank Chase in the U.K. in 2021 and continues to expand investment banking and asset management operations in China.

JPMorgan remains focused on strengthening its loan portfolio. Despite a tough operating backdrop, loan balances have remained solid over the past several years. As of Mar 31, 2023, the loans to deposits ratio was 47%. Though a potential recession/economic slowdown will hamper loan demand to some extent, the company will be able to capitalize on its scale to record decent loan growth going forward.

JPMorgan has a solid capital deployment plan. Following the clearance of the 2022 stress test, the bank kept the quarterly dividend unchanged at $1 per share. Also, JPM intends to repurchase shares worth $12 billion this year. Driven by a strong capital position and earnings strength, the company is expected to sustain current capital deployments.

With a market cap of $401.7 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 has moved 10.8% upward for 2023 over the past two months. The stock has rallied 1.2% so far this year.

Price and Consensus: JPM


Bank of America: With total assets worth $3.19 trillion as of Mar 31, 2023, Bank of America is one of the largest financial holding companies in the United States. The company provides a diverse range of banking and non-banking financial services and products across North America and globally.

BAC is well-poised to benefit from higher rates as its balance sheet is highly asset-sensitive. While rising funding costs will weigh on NII growth, management projects the metric to rise in the range of 7-8% this year.

Bank of America continues to align its banking center network according to customer needs. These initiatives, along with the success of Zelle and Erica, have enabled it to improve digital offerings and cross-sell several products, including mortgages, auto loans and credit cards. The acquisition of Axia Technologies has further strengthened its healthcare payments business.

Bank of America remains focused on strengthening its loan portfolio. Despite a challenging operating environment, loan balances have remained solid over the past several years. Though loan demand remained subdued during the pandemic, the same has been witnessing an increase of late. As of Mar 31, 2023, the company’s total loans and leases grew 5.4% year over year to $1.05 trillion. While tightening of the monetary policy and rising recession risk are major near-term headwinds, the demand for loans is expected to remain decent in the quarters ahead.

Post the clearance of the 2022 stress test, Bank of America announced a dividend hike of 4.8% in July 2022, following a 17% hike in July 2021. In October 2021, the company's share repurchase plan of $25 billion was renewed. In first-quarter 2023, BAC returned $4 billion to shareholders in the forms of buybacks and dividend payouts. Driven by a strong capital position and earnings strength, it is expected to sustain improved capital deployments and enhance shareholder value.

With a market cap of $225.2 billion, Bank of America’s efforts to improve revenues, strong balance sheet and expansion into new markets will support financials. Over the past two months, the Zacks Consensus Estimate for 2023 earnings has moved 2.1% north. So far this year, shares of BAC have lost 16.1%.

Price and Consensus: BAC


Citigroup: As a globally diversified financial services holding company, Citigroup provides a range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage and wealth management. The company has nearly 200 million customer accounts in almost 160 countries and jurisdictions.

Similar to JPM and BAC, Citigroup will continue to benefit higher interest rate regime and decent loan growth. For 2023, management expects revenues (excluding 2023 divestiture-related impacts) to be $78-$79 billion, up in the range of 3-5% year over year. NII (excluding Markets) is expected to be $45 billion.

This Zacks Rank #3 bank continues to increase its fee-based business mix and shrink non-core assets. C has been investing in growth opportunities across wealth and commercial banking, treasury and trade solutions, and securities service businesses to grow fee revenues across the Institutional Clients Group segment.

Citigroup is streamlining operations internationally. In sync with this, the company announced a major strategic action in April 2021 to exit consumer banking across 14 markets in Asia, Europe, the Middle East and Mexico. Since then, it has signed deals to divest consumer businesses in nine markets and completed sales in seven markets, including Australia, Bahrain, Malaysia, the Philippines, Thailand, Vietnam and India.  

The company is also winding down its consumer business in China and Korea, whereas, in Russia, it is wrapping up all its business. Further, this May, C revealed its plan to pursue an IPO of the Mexican business in 2025.

Such exits will free up capital and help the company pursue investments in wealth management operations in Singapore, Hong Kong, the UAE and London to stoke growth. These efforts will likely help augment the company’s profitability and efficiency over the long term.

Citigroup’s focus on maintaining a strong capital base will support its capital deployment activities. The company returned $1 billion in capital to shareholders in the form of common dividends in first-quarter 2023. It suspended share repurchases from third-quarter 2022 in anticipation of any temporary negative capital impacts related to the potential sale of Banamex in Mexico. C expects to resume a modest level of share buybacks in second-quarter 2023. Yet, owing to the uncertainty regarding regulatory capital requirements, it will continue to assess buybacks on a quarterly basis.

Citigroup has a market cap of $87 billion. A diverse business model, focus on core operations and streamlining of international businesses will keep supporting the company’s prospects. Over the past 60 days, the Zacks Consensus Estimate for 2023 earnings has been revised 5.2% upward. In the year-to-date period, the stock has declined 2%.

Price and Consensus: C

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