- 5 Major Bank Stocks to Buy and Hold for the Rest of 2020
- Bank Stocks to Buy: Bank of America (BAC)
- JPMorgan (JPM)
- Truist Financial (TFC)
- U.S. Bancorp (USB)
- Wells Fargo (WFC)
- JPMorgan, Bank of America, Wells Fargo plan healthy dividend hikes
- JPMorgan Chase
- Capital One
- Bank of America Corporation
- BNY Mellon
- Wells Fargo
- Goldman Sachs
- What to expect as banks report earnings: more loan pain but plenty of fee income
- No crystal ball ..
- … But plenty of love on the sell-side
5 Major Bank Stocks to Buy and Hold for the Rest of 2020
As bank stocks recover, should you jump in? The novel coronavirus, and near-zero interest rates, pushed the sector to multi-year lows back in March. But, with the pandemic less of a tailwind than expected, the big banks have recovered significantly since the spring.
Yet, there’s still plenty left on the table for those entering today. Shares in major banks may have risen significantly off their lows. But, across-the-board, they remain far below their pre-pandemic highs. This may not last for long.
Even as the new virus lingers, the American economy continues to stage a comeback. As the overall economy improves, so do the prospects for the big banks. In short, there’s a good reason why names in the sector could make a full recovery sooner rather than later.
Given this factor, buying bank stocks continues to be a strong opportunity. Here are five names to buy today, and hold through at least the end of 2020:
- Bank of America (NYSE:BAC)
- JPMorgan (NYSE:JPM)
- Truist Financial (NYSE:TFC)
- U.S. Bancorp (NYSE:USB)
- Wells Fargo (NYSE:WFC)
Sure, some of these major banks face stronger prospects than others. But, as the overall tide lifts all boats in the sector, these five names are all set to trend higher as we enter the final stretch of 2020, and look forward to 2021.
Bank Stocks to Buy: Bank of America (BAC)
Source: Tero Vesalainen/Shutterstock
At around $26.50 per share, BAC stock has bounced back big-time since hitting prices as low as $17.95 per share. But, the major bank stock, a good proxy for the overall health of the U.S. economy, has a way to go before it retraces its pre-pandemic prices (around $35 per share).
So, can Bank of America continue to trend higher? Definitely! As our own Luke Lango wrote last month, macro-economic improvements will drive positive revenue growth at BofA. Coupled with today’s historically low interest rates slowly climbing higher, the company’s earnings should see improvement, giving investors plenty of reason to bid shares higher.
And that’s not all! Warren Buffett buying shares hand-over-fist helps to support the case that shares are a screaming buy at today’s prices. Granted, Wall Street hasn’t been as enthusiastic about this stock as the legendary investor. But, with the aforementioned macro improvements on the horizon, the overall investment community may soon change their tune.
Sure, this probably isn’t the kind of stock that’s going to double in a year. Even getting back to its pre-outbreak prices could take some time. But, given the low lihood shares fall back to prior lows, the risk/return in BAC stock remains in your favor.
Source: Bjorn Bakstad / Shutterstock.com
Sometimes you have to pay up for quality. And that’s the case with JPM stock. Compared to its money center peers BofA, Citigroup (NYSE:C) and Wells Fargo, shares in this banking giant trade at a premium valuation (168% of tangible book).
This high price-to-book ratio alone makes it sound JP Morgan is fully priced. However, its big bank peers, shares remain far below their pre-pandemic prices. Shares change hands today around $102 per share, versus just below $140 per share before the novel coronavirus hit the U.S.
So, how can the stock continue to trend higher, even with its richer valuation? As this pundit put it, the bank’s 15% year-over-year revenue increase in the recent quarter bodes well for shares. Earnings were depressed by a $10.5 billion write-down, but expect said earnings to bounce back as the overall U.S. economy improves.
In short, there’s plenty of upside on the table. Instead of the stock treading water due to a premium valuation, expect it to move in tandem with the other big bank names.
Truist Financial (TFC)
This super-regional banking giant, the result of the BB&T–SunTrust merger, is another major bank stock to consider. TFC stock has seen similar price action as its rivals. the money center names, shares tumbled as the outbreak hit America. And, BofA, Citi and JPMorgan, the stock has made a partial recovery in the subsequent months.
With Truist moving in-line with the sector, will shares continue to trend higher? It’s possible. As seen from the last quarterly earnings report, the company’s non-consumer banking businesses (investment banking, insurance) are helping it beat the analyst community’s still-tempered expectations.
For the second quarter, the company posted adjusted earnings of 82 cents per share, versus the Street’s estimate of 73 cents per share. In a solid position, Truist is still situated for the anticipated recovery. And, as the macro environment turns more in the banking sector’s favor, expect strong performance through the end of 2020.
U.S. Bancorp (USB)
Source: Sundry Photography/Shutterstock.com
Granted, with a tangible price-to-book ratio of 1.6, USB stock doesn’t look a value play. But, when you factor in the stock’s solid 4.45% dividend yield, as well as its strong underlying fundamentals, this is a name you can’t ignore as the sector-at-large stages a comeback.
As this commentator noted, U.S. Bancorp sports a wide economic moat. With higher margins and return on equity than its peers, this bank has more in common with JPMorgan than a high valuation: this bank is also a high-quality play.
Considering this quality factor, this super-regional banking name should see a strong recovery as the macro picture continues to improve. And, as things are getting better, not worse, don’t expect today’s solid dividend yield to go away. With the company itself stating it expects to maintain the current payout, income investors can sleep well at night.
And for those looking for appreciation rather than yield? USB is one of those bank stocks that has you covered. Given that shares remain more than 38% below their 52-week high, there’s plenty of recovery driven upside left on the table.
Wells Fargo (WFC)
Source: Martina Badini / Shutterstock.com
Compared to other bank stocks, Wells Fargo wasn’t exactly in a good place before the outbreak. Still struggling due to its fake accounts scandal a few years back, an asset cap imposed by the government limited this bank’s potential.
Unable to grow organically, the company turned to buybacks and dividends to move the needle for WFC stock. But, with the crisis, these aren’t on the table at the moment.
However, this struggling bank doesn’t just have the specter of an improved economic environment in its corner. As I wrote back on Jul 21, it’s a “darkest before the dawn” scenario with Wells Fargo.
How so? Firstly, the company’s plans to slash $10 billion of annual operating expenses means the bank has a solid plan to bounce back to prior levels of profitability. Also, at today’s low valuation (shares trade for just 79% of tangible book value), the risk of further downside is more than priced-into shares.
In short, if the macro picture improves, and the bank succeeds in its turnaround, expect shares to move substantially higher than where they trade today. At $25 per share, a full recovery to pre-outbreak prices would mean a nearly 100% return for investors.
And, what if the company fails to deliver? With shares still near their 52-week low of $22 per share, it’s hard to see the stock falling further from here. Yes, this isn’t a quality play JPMorgan or U.S. Bancorp. But, for a small position, consider this out-of-favor bank stock a top name to buy as the overall sector stages a recovery.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
JPMorgan, Bank of America, Wells Fargo plan healthy dividend hikes
The Federal Reserve announced on Friday that “virtually all” of the nation’s largest banks are meeting expectations for capital planning and have the green light to boost dividends and share buybacks.
Only one of the country’s 18 largest banks is required to address limited weaknesses identified in the second round of the Fed’s annual stress test. Credit Suisse passed the test, but is restricted from raising payouts until the issue is addressed.
“The stress tests have confirmed that the largest banks are both well capitalized and place a high priority on strong capital planning practices,” said Vice Chair for Supervision Randal K. Quarles. “The results show that these firms and our financial system are resilient in normal times and under stress.”
This was only the second time since the Fed began administering these tests in 2009 that no bank failed. The Fed reports that the firms have significantly increased their capital since the first round of tests, more than doubling their common equity capital from around $300 billion to roughly $800 billion during that time.
A healthy financial system means many of the largest U.S. banks will be giving investors a healthy dividend hike. FOX Business takes a look at some of the pending payouts.
|JPM||JPMORGAN CHASE & CO.||154.50||+1.83||+1.20%|
The company will raise dividends to $0.90 from $0.80. In addition, the company has authorized gross common equity repurchases of up to $29.4 billion between July 1, 2019 and June 30, 2020 under a new common equity repurchase program.
Jamie Dimon, chairman and CEO of JPMorgan Chase said: “The strength of our franchise has allowed us to continue to use our capital to grow and invest in our businesses to support our customers, clients and communities around the world. We are pleased to have the capacity and flexibility to return excess capital to our shareholders as we maintain a fortress balance sheet that provides the ability to withstand extreme stress.”
|COF||CAPITAL ONE FINANCIAL CORP.||129.06||+1.26||+0.99%|
The company expects to maintain its quarterly dividend of $0.
40 per share, upon approval from its Board of Directors. In addition, the company’s board of directors have already authorized a repurchase of up to $2.
2 billion of shares of the company's common stock beginning in the third quarter of 2019 through the end of the second quarter of 2020.
Bank of America Corporation
|BAC||BANK OF AMERICA CORP.||38.37||+0.67||+1.78%|
The company's dividends will rise by 20 percent, and the company will return as much as $37 billion to common stockholders.
Its quarterly common stock dividend will increase to $0.18 per share. It has been authorized to repurchase approximately $30.9 billion in common stock from July 1 through June 30, 2020. The buybacks would include approximately $0.
9 billion in repurchases to offset shares awarded under equity-based compensation plans during the same period.
|BNY||BLACKROCK N Y MUN INCOME TRUST||15.05||+0.02||+0.13%|
The company's board of directors approved the repurchase of up to $3.
94 billion of its common stock starting in the third quarter of 2019 and continuing through the second quarter of 2020, an increase of approximately 20 percent versus the prior four-quarter period.
The company also intends to increase its quarterly cash dividend on common stock by approximately 11 percent from $0.28 to $0.31 per share.
|WFC||WELLS FARGO & CO.||39.73||+0.41||+1.04%|
The company expects to increase its third-quarter 2019 common stock dividend to $0.
51 per share from $0.45 per share, upon the board of directors' approval. In addition, Wells Fargo plans repurchases of up to $23.1 billion for the four-quarter period.
The company may also consider redemptions or repurchases of other capital securities.
“Today’s positive CCAR result demonstrates the strength of Wells Fargo’s diversified business model, our sound financial risk management practices, and our strong capital position,” said interim CEO and President Allen Parker. “We continue to return excess capital responsibly to shareholders and remain committed to our goal to be the financial services leader in creating long-term shareholder value.”
|PNC||PNC FINL SVC||179.47||+2.37||+1.34%|
The company’s board of directors is expected to consider a recommendation to increase the quarterly cash dividend on common stock by $0.20 cents per share, or 21 percent, to $1.15 per share.
The capital plan also included share repurchase programs of up to $4.3 billion for the four-quarter period beginning in the third quarter of 2019.
Citi is looking to increase the quarterly common stock dividend by 13 percent from $0.45 to $0.51 per share as well as a common stock repurchase program of up to $17.
1 billion during the four quarters. These planned capital actions will total to $21.5 billion over the four quarters.
“Looking ahead, we are focused on continuing to serve our clients with distinction, improving returns for our shareholders and making the investments necessary to ensure safety and soundness,” Citi CEO Michael Corbat said.
|GS||THE GOLDMAN SACHS GROUP, INC.||332.80||+2.26||+0.68%|
The company will increase dividends by 47 percent from $0.85 to $1.25 per share. The capital plan will provide for up to $7.0 billion in repurchases and $1.8 billion in total common stock dividends.
“The opportunity to increase capital return to our shareholders reflects the financial strength of the firm,” said David M. Solomon, chairman and CEO.
“We are pleased to have the ability to increase our common stock dividend while pursuing our strategic growth initiatives.
Through our capital plan and the reinvestment in our business, we remain committed to driving long-term shareholder returns.”
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What to expect as banks report earnings: more loan pain but plenty of fee income
The largest U.S. banks will announce their second-quarter results this week. Investors should expect another big hit to earnings as banks set aside more money to cover expected loan losses. On the other hand, the big banks are also continuing to see a boost to fee income from elevated investment-banking and trading activity, even as the coronavirus crisis continues.
JPMorgan Chase & Co. JPM, +1.24%, Citigroup Inc. C, +1.66% and Wells Fargo & Co. WFC, +1.09% are all scheduled to report their second-quarter results on Tuesday. Goldman Sachs Group Inc. GS, +0.
73% is expected to report on July 15, followed by Bank of America Corp. BAC, +1.90% and Morgan Stanley MS, +1.28% on July 16, to round out the “big six” U.S. banks.
All earnings announcement will be made before the market open.
Opinions about the group vary greatly. Investors naturally shy away from bank stocks during a recession.
Memories of the 2008 financial crisis, caused in great part by the banks and resulting in a government bailout and dilutive capital raises, are fresh enough.
But this time around, “capital levels are good and sturdy for the large U.S. banks,” according to Jon Curran, a senior bank analyst and portfolio manager at Aberdeen Standard Investments.
During an interview, Curran pointed to “a surge in investment-grade bond offerings” as well as fees from increased mortgage lending as two factors that are helping to offset the big banks’ rising credit costs.
Below are consensus second-quarter earnings-per-share estimates among analysts polled by FactSet, along with actual numbers from the previous quarter and the year-earlier quarter:
|Bank holding company||Ticker||Total assets – March 31, 2020 ($bil)||Estimated EPS – Q2, 2020||EPS – Q1, 2020||EPS – Q2, 2019|
|JPMorgan Chase & Co.||JPM, +1.24%||$3,139||$1.08||$0.78||$2.82|
|Bank of America Corp.||BAC, +1.90%||$2,620||$0.29||$0.40||$0.74|
|Citigroup Inc.||C, +1.66%||$2,220||$0.31||$1.05||$1.95|
|Wells Fargo & Co.||WFC, +1.09%||$1,981||-$0.05||$0.01||$1.30|
|Goldman Sachs Group Inc.||GS, +0.73%||$1,090||$3.68||$3.11||$5.81|
|Morgan Stanley||MS, +1.28%||$948||$1.09||$1.01||$1.23|
You may have to scroll the tables to see all of the data. You can click on the tickers for more about each company, including news coverage and price charts.
Three of the six are expected to show sequential improvements in earnings. Profits will be down significantly from a year earlier, because of the higher provisions for loan losses.
|Bank holding company||Ticker||Estimated provision for loan-loss reserves – Q2, 2020 ($mil)||Provision for loan-loss reserves – Q1, 2020 ($mil)||Provision for loan-loss reserves – Q2, 2019 ($mil)||Estimated net income – Q2, 2020 ($mil)||Net income – Q1, 2020 ($mil)||Net income – Q2, 2019 ($mil)|
|JPMorgan Chase & Co.||JPM, +1.24%||$8,105||$8,285||$1,149||$3,438||$2,852||$9,596|
|Bank of America Corp.||BAC, +1.90%||$5,082||$4,761||$857||$2,783||$4,010||$7,348|
|Citigroup Inc.||C, +1.66%||$6,953||$6,446||$2,074||$773||$2,519||$4,732|
|Wells Fargo & Co.||WFC, +1.09%||$4,559||$4,005||$503||$78||$653||$6,206|
|Goldman Sachs Group Inc.||GS, +0.73%||$991||$937||$214||$1,360||$1,213||$2,421|
|Morgan Stanley||MS, +1.28%||N/A||$292||$0||$1,715||$1,698||$2,201|
The provision is the amount added to loan-loss reserves each quarter; it directly affects earnings. A lender will set aside specific reserves for commercial loans that it expects will not be repaid, while estimating how much reserve coverage it will need for other loan types.
At the end of the first quarter, the banks quickly boosted reserves, even though only a few weeks had passed since the World Health Organization had declared COVID-19 a pandemic on March 11. At the end of the second quarter, banks were still early in the nonperforming loan cycle.
Not only have some businesses been able to avoid loan defaults by participating in the Payment Protection Program, but the CARES Act, with its extra $600 a week in unemployment benefits (set to expire July 31), has pushed back mortgage loan and credit-card defaults, while helping rents continue to flow to landlords.
Banks’ loan forbearances and payment deferments have also stretched the credit cycle.
The above numbers show the analysts expect the second-quarter numbers to be pretty much a repeat of the first quarter, with a significant sequential increase in earnings for JPMorgan Chase, and painful earnings decline for Wells Fargo. (Yes, the consensus among analysts is for Wells Fargo to lose 5 cents a share in the second quarter, while the consensus net income estimate is a slight profit of $78 million.)
Here’s why JPMorgan Chase, Goldman Sachs and Morgan Stanely are expected to show higher earnings in the second quarter than in the first:
|Bank holding company||Ticker||Estimated noninterest income – Q2, 2020||Noninterest income – Q1, 2020||Noninterest income – Q4, 2019|
|JPMorgan Chase & Co.||JPM, +1.24%||$15,019||$13,812||$14,434|
|Bank of America Corp.||BAC, +1.90%||$10,568||$10,637||$10,895|
|Citigroup Inc.||C, +1.66%||$7,776||$9,239||$6,808|
|Wells Fargo & Co.||WFC, +1.09%||$8,016||$6,405||$9,489|
|Goldman Sachs Group Inc.||GS, +0.73%||$8,155||$7,430||$8,390|
|Morgan Stanley||MS, +1.28%||$8,935||$8,131||$9,215|
The Federal Reserve’s quick action to lower the federal-funds rate target to a range of zero to 0.
25% on March 15, along with the central bank’s aggressive bond purchases, have led to such a decline in interest rates that companies are scrambling to lock in those low rates by issuing bonds.
People are refinancing their homes for the same reason. All of this action, along with the remarkable recovery for the U.S. stock market from its late-March lows, boosts banks’ fee revenue.
David Konrad, a senior research analyst at D.A. Davidson, upgraded his rating for J.P.
Morgan Chase to a “buy” on July 9, writing in a note to clients that he expected the bank to be “the largest beneficiary” of the increased liquidity brought about by the Federal Reserve.
The “unique opportunity to buy the stock at “a cheaper than peer valuation,” is underlined by the strong bond market and “increased risk appetite from investors leading to opportunities in [fixed income trading] and equity derivatives,” he wrote.
No crystal ball ..
In his banking industry earnings preview report on July 8, J.P. Morgan senior analyst Vivek Juneja called the credit situation for the industry “still opaque due to deferrals/forbearance.”
Curran of Aberdeen Standard Investments called the loan-quality picture “a known unknown,” even when saying that “there is a strong foundation right now for the large banks” because of their capital strength and much higher loan underwriting standards when compared to the years before the 2008 credit crisis.
Ken Usdin, Jefferies managing director of equity research, summed up the credit mystery in his industry earnings preview on July 9: “Tell us about 3Q20.”
For investors, quite a bit is riding on how confident they are in the U.S. economy’s ability to bounce back quickly. As if all the moving parts weren’t enough, the rapid rise in infections as states began reopening their economies is creating more uncertainty. An extension of the extra $600 a week for unemployment benefit recipients would no doubt be cheered by stock investors.
“The nice thing about large diversified money-center banks is they have all sorts of levers” to pull to make money, even when interest rates are very low, Curran said.
The banks fared pretty well in this year’s regulatory stress tests, which the Federal Reserve augmented to reflect the severity of the coronavirus recession.
Among the six big banks, only Wells Fargo said it was ly to cut its dividend.
But there is still uncertainty because the banks will need to submit new capital plans to the Fed, and their dividends cannot exceed the rolling average net income for four quarters.
Next week, investors’ reaction to earnings reports may ride on bank management teams’ outlooks, Curran said. You can go to the banks’ investor relations sites to listen to earnings calls. Some will later post transcripts of their call.
… But plenty of love on the sell-side
Wall Street analysts have majority “buy” or equivalent ratings for five of the six major U.S. banks.
|Bank holding company||Ticker||Share 'buy' ratings||Share neutral ratings||Share 'sell' ratings||Closing price – July 8||Consensus price target||Implied 12-month upside potential|
|JPMorgan Chase & Co.||JPM, +1.24%||52%||44%||4%||$93.30||$109.79||18%|
|Bank of America Corp.||BAC, +1.90%||59%||41%||0%||$23.10||$28.19||22%|
|Citigroup Inc.||C, +1.66%||85%||15%||0%||$50.88||$65.83||29%|
|Wells Fargo & Co.||WFC, +1.09%||17%||62%||21%||$24.55||$31.54||28%|
|Goldman Sachs Group Inc.||GS, +0.73%||58%||42%||0%||$202.25||$231.70||15%|
|Morgan Stanley||MS, +1.28%||69%||31%||0%||$48.91||$53.29||9%|
Wells Fargo is singled out in part because of the Federal Reserve’s regulatory restriction on growth of its total assets, which resulted from several customer-service scandals. The bank’s shares are down 51% this year (with dividends reinvested), compared to a decline of 36% for the KBW Bank Index BKX, +1.59%.
Susan Roth Katzke, the senior analyst covering U.S. large-cap banks at Credit Suisse, has a neutral rating on Wells Fargo’s stock. However, wrote in a note to clients on July 8 that she was “far more interested in the stock given the expressed risks and underappreciated longer term value inherent in the Wells Fargo franchise.”