U.S. banks have been navigating a minefield of tumultuous conditions throughout much of the year, leading to a greater concern regarding the overall well-being of the American banking sector.
Investors have shrugged their attention away from JPMorgan Chase’s (NYSE:JPM) rescue efforts of First Republic Bank (OTCMKTS:FRCB), after the bank announced that it would buy out the disgruntled regional bank for $10.6 billion in a statement during the first week of May 2023.
This comes at a crucial time, as Wall Street analysts are begging to understand where the American banking sector may be heading following the collapse of Silicon Valley Bank (OTCMKTS:SIVBQ) in March this year, which narrowly caused an air of concern among depositors after the news broke headlines.
Regional Lenders Are Struggling
While JPMorgan’s efforts didn’t herald the end of a possible banking crisis, investors are gearing their focus towards smaller regional lenders that have seen shares plummeting in recent weeks.
Given the current economic uncertainty, shares of the California-based lender, Pacific Western Bank (NASDAQ:PACW) or PacWest, have shed more than 70% since the start of the year. Despite the negativity, PacWest CEO Paul Taylor has reassured investors that the bank’s business structure has until thus far remained “fundamentally sound.”
Other regional lenders, including First Horizon (NYSE:FHN) and TD Bank (NYSE:TD), have in recent weeks also called off a $13 billion deal, which would have merged to become America’s sixth-largest bank. First Horizon has lost close to 40% of its share value since the start of May.
Tough economic conditions have put Wall Street on high alert, as bank shares have struggled to shake off pandemic-era declines. The KBW Bank Index, which tracks leading American lenders, has declined 26% this year already, with a near 6% decline between May 1 and May 9.
Taking into consideration broader economic headwinds, investors are still recuperating from the Federal Reserve’s aggressive monetary tightening, after the central bank raised its base interest rate for the tenth consecutive time by 25 basis points on May 3, 2023.
While it looks as if the Fed could hold off on their monetary cycle, for now at least, after the Bureau of Labor Statistics reported cooler-than-expected inflation data for April, with prices rising 4.9%, compared to Wall Street estimates of 5%, other challenges caused by the U.S. fast-approaching deadline to raise the debt ceiling could pose yet another hurdle.
Banking Stocks That Remain Uncrushed
There is however a slight sense of positivity for investors looking to climb into the American banking and finance sector. Yet, it’s undeniable that major risks associated with the banking sector such as cyclicality, loan losses, and interest rate risks, remain among the biggest concerns for investors right now.
For those investors that do however consider taking up their position of investing in some of America’s biggest lenders, the risks associated remain staggeringly high.
However, investing in banks is a committed long-term option, although some analysts claim that the coming months could see banking stocks rally as they shrug off the recent economic turmoil. Even with stocks sliding across the board, some big-bank names continue to hold their steam as investors and economists hold their breath for a potential soft landing.
JPMorgan Chase
Although conditions have not been the most promising for even America’s biggest lenders this year, JPMorgan Chase holds a steady performance, with six out of 13 analysts recommending JPM as a Strong Buy and four recommending it as a Buy.
Furthermore, the bank has forecasted an annual revenue growth rate of 3.55%, outpacing the U.S. Banks Diversified average revenue growth rate of 3.02%. Still, the bank will be unable to beat the overall U.S. Market average forecast revenue growth rate of 8.79%.
JPMorgan now holds more than $3 trillion in combined assets, and although its balance sheet has been rocked by tough economic headwinds, overall stock performance has held out relatively well considering how things have unfolded over the last several months.
So far, year-to-date (YTD) growth has been mild at 0.95%, and shares have gained a mediocre 6.6% between April and May. The bank is expected to make $12 billion in stock buybacks this year, which could in the near-term help boost its earnings per share (EPS).
Fifth Third Bancorp
Among regional banks, Fifth Third Bancorp (NASDAQ:FITB) has remained a stalwart on the back of the bankrupt Silicon Valley Bank, which helped accelerate its growth, both in its earnings and share performance after the news broke.
Although FITB nosedived at the collapse of SVB, along with other major names such as JPMorgan and Bank of America, it proved to remain buoyant with access to $102 billion in liquidity sources.
During the first week of May, FITB managed to regain 4.45% of its share price, after sliding 2.20% during April. While volatility remains high, and investors share skepticism over the bank’s overall well-being amid a looming banking crisis and ongoing recession talk, Fifth Third helped shed more color on its conditions following its Q1 2023 earnings report.
Both its consumer and commercial deposit segment remains relatively healthy, with the bank reporting a 71% of retail stable per liquidity coverage ratio (LCR). Even more, the bank claimed that nearly 88% of its deposits are FDIC insured, and the bank has limited exposure to other liabilities such as commercial real estate.
The bank features a mix of consumer customers, with 69% of them being digitally active, Their seemingly progressive banking sales incentives programs have managed to pay off, with more than 80% current balances being primarily from customers that have been with the bank for more than five years.
There’s nothing special to mention about FITB, and while share performance has been all over the board since the start of the year, being stagnant in volatile conditions can sometimes be a good thing as well.
Wells Fargo
Another American heavyweight is Wells Fargo (NYSE:WFC), which currently holds an average brokerage recommendation (ABR) of 1.90, this is on a 1 to 5 scale, on a Strong Buy to Strong Sell scale. Based on brokerage and analysts’ recommendations, Wells Fargo holds a steady position amid volatility in the wider banking sector.
WFC earnings prospects have remained largely unchanged, and this could be an indication for the stock to perform in line with the broader market in the near term.
During the height of the SVB collapse, WFC fell sharply by 17%, but over the long-term stretch of YTD performance, stocks are down close to 8%, still relatively lower than what many expected.
Over the past month or so, investors have yet again seen growing potential in WFC, as the stock has steadily climbed by 0.52%, closely approaching its peak in May 2023 of $40.39 per share.
Furthermore, its balance sheet sees positive improvement, with the bank reporting a 5% increase in year-over-year revenue ending March 2023. Total net income is also up by 31% for the same recorded period.
There’s a good chance that WFC could see slight fluctuations in the coming months, but the bank’s diverse loan book, which holds a steady amount of loan advance to consumers and commercial players, has ensured investors that it remains a buoyant banking heavyweight.
Citizens Financial Group
The turmoil and self-off of First Republic to JPMorgan have meant meager tumult for Citizen Financial Group (NYSE:CFG), yet in an earlier Argu analysis in April, analysts held CFG at a Buy, with a price target of $47.00 per share, slightly down from its previous price target of $52.00 per share.
Even before this rating by Argus, the bank has marked 13 buy ratings and six hold ratings and only has one sell rating.
On the financial side of things, both revenue and net income have improved year-over-year, seeing steady increases of 19.37% and 21.67%, respectively for the period ending March 2023. The company has also boosted its assets by 22%, marking $222 billion in assets for the same recorded period.
The Providence, Rhode Island-headquartered bank did, however, see its number of regional deposits dip between December 31, 2022, and March 31, 2022, which fell by $8.5 billion during this period.
Although Citizens First isn’t the only bank that recorded a decline in deposits, U.S. Bancorp noticed a decline of $20 billion in deposits during the same recorded period.
While there is still a lot of uncertainty looming overhead, coming to terms with that CFG could be a sink or swim scenario in the near term could help investors solidify their position with Citizens First.
What’s The Verdict?
While there are a lot of risks currently bubbling at the surface, it’s hard to give a definitive answer on whether or not the banking sector is a good place for investors to park their cash. There’s still too much uncertainty looming overhead, and despite other economic indicators showing improvement, the banking sector remains roiled with volatility.
Ultimately, investing in big banks could be the stalemate that investors need to expose themselves to different segments of the market, yet this should be done through extreme caution and consideration.
Taking into account the events of the last few months, there’s both certainty and uncertainty that makes up the census of whether banking stocks are the right pick right now.
Bear in mind, that however, conditions may swing, bank stocks remain a long-term investing option, and investors should consider their options against broader economic conditions while navigating their options against the backdrop of historic performance data, and how well these banks can hold out against wider market and economic declines.
