The banking industry has faced significant challenges since the beginning of the year. After the sector witnessed brief stability, major credit rating agencies have downgraded several banks and warned of potential rating downgrades for some of the nation’s biggest banks.

Amid the potential risks arising out of stricter lending norms, possible default of commercial real estate (CRE) loans, slowing loan growth, and rising deposit costs, it could be wise to add fundamentally strong major bank stocks, JPMorgan Chase & Co. (JPM), Wells Fargo & Company (WFC), and Bank of America Corporation (BAC), to one’s watchlist. Among these three stocks, BAC has better momentum.

Before diving deeper into the fundamentals of these stocks, let’s look at the factors currently affecting the U.S. banking sector.

After the failure of three regional banks earlier this year, the U.S. banking industry had to contend with large deposit outflows with customers seeking out higher yields, higher deposit costs, and tighter profit margins. Despite some signs of stability, U.S. banks continue to lose deposits. Deposits declined for the fifth consecutive quarter ended June 30, 2023.

Deposits at the FDIC-insured banks fell almost $100 billion during the second quarter. Moreover, net income across the industry fell by $9 billion to $70.80 billion in the second quarter, and the average net interest margin declined three basis points to 3.28%. Last month, Moody’s cut the credit ratings of 10 small and mid-sized banks and placed several big banks on negative review.

Moody’s analysts Jill Cetina and Ana Arsov said, “U.S. banks continue to contend with interest rate and asset-liability management (ALM) risks with implications for liquidity and capital, as the wind-down of unconventional monetary policy drains systemwide deposits and higher interest rates depress value of fixed-rate assets.”

S&P Global followed suit, downgrading five U.S. banks while putting two others on notice. In June, Fitch downgraded the entire U.S. banking sector by lowering its “operating environment” score to AA- from AA. The agency has recently warned of a potential rating downgrade for America’s biggest banks if the sector gets another one-rung cut.

With the benchmark interest rates at their highest level in 22 years, banks feel the pressure of rising deposit costs. Higher benchmark interest rates have made borrowing expensive, slowing down banks’ loan growth. Moreover, stricter lending standards will likely intensify pressure on banks’ profits.

Given the uncertainty around the industry, it’s time to examine the fundamentals of the top three stocks to watch in the Money Center Banks industry, starting with the third in line.

Stock #3: JPMorgan Chase & Co. (JPM)

JPM operates as a financial services company worldwide. It operates through four segments: Consumer & Community Banking (CCB), Corporate & Investment Bank (CIB), Commercial Banking (CB), and Asset & Wealth Management (AWM).

In terms of the trailing-12-month net income margin, JPM’s 35.38% is 37.2% higher than the 25.78% industry average. Likewise, its 17.11% trailing-12-month Return on Common Equity is 51.4% higher than the industry average of 11.30%. Furthermore, the stock’s 1.24% trailing-12-month Return on Total Assets is 7.8% higher than the industry average of 1.15%.

JPM’s total net revenue - reported for the second quarter ended June 30, 2023, increased 34.5% year-over-year to $41.31 billion. Its net income rose 67.3% year-over-year to $14.47 billion. In addition, its EPS came in at $4.75, representing an increase of 72.1% year-over-year. Its return on common equity (ROE) was 20%, compared to 13% in the year-ago period. Also, its CET1 ratio was 13.8%, compared to 12.2% in the prior-year quarter.

Analysts expect JPM’s EPS and revenue for the quarter ending September 30, 2023, to increase 22.7% and 20.6% year-over-year to $3.83 and $39.44 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 21.2% to close the last trading session at $144.46.

JPM’s POWR Ratings are consistent with this uncertain outlook. It has an overall rating of C, translating to Neutral in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

It has a C grade for Growth, Value, Momentum, Stability, and Quality. It is ranked #3 out of 10 stocks in the Money Center Banks industry. To see JPM’s rating for Sentiment, click here.

Stock #2: Wells Fargo & Company (WFC)

WFC, a diversified financial services company, provides banking, investment, mortgage, and consumer and commercial finance products and services in the United States and internationally. It operates through four segments: Consumer Banking and Lending; Commercial Banking; Corporate and Investment Banking; and Wealth and Investment Management.

WFC’s total revenue for the second quarter ended June 30, 2023, increased 20.5% year-over-year to $20.53 billion. Its net income rose 57.2% year-over-year to $4.94 billion. Its EPS came in at $1.25, representing an increase of 66.7% year-over-year.

Its ROE came in at 11.4%, compared to 7.2% in the prior-year quarter. Also, its net interest income rose 29% year-over-year to $13.16 billion. In addition, its CET1 ratio came in at 10.7% compared to 10.4% in the year-ago period.

For the quarter ending September 30, 2023, WFC’s revenue is expected to increase 3.1% year-over-year to $20.10 billion. Its EPS for the same quarter is expected to decline 4.8% year-over-year to $1.24. It surpassed the consensus EPS estimates in each of the trailing four quarters. The stock has gained 0.1% year-to-date to close the last trading session at $41.33.

WFC’s uncertain outlook is reflected in its POWR Ratings. It has an overall rating of C, which translates to Neutral in our proprietary rating system.

It has a C grade for Growth, Value, Momentum, Stability, and Quality. It is ranked #2 in the same industry. To see WFC’s rating for Sentiment, click here.

Stock #1: 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.

In terms of the trailing-12-month net income margin, BAC’s 30.88% is 19.8% higher than the 25.78% industry average. Likewise, its 11.41% trailing-12-month Return on Common Equity is 1% higher than the industry average of 11.30%.

For the second quarter ended June 30, 2023, BAC’s total revenue, net of interest expense, increased 11.1% year-over-year to $25.20 billion. Its net income applicable to common stockholders rose 19.7% year-over-year to $7.10 billion.

Additionally, its EPS came in at $0.88, representing an increase of 20.5% year-over-year. Also, its net interest income rose 13.8% over the prior-year quarter to $14.16 billion. In addition, its CET1 ratio came in at 11.6%, compared to 10.5% in the year-ago quarter.

Street expects BAC’s revenue for the quarter ending September 30, 2023, to increase 2.7% year-over-year to $25.16 billion. On the other hand, its EPS for the same quarter is expected to decline 0.2% year-over-year to $0.81. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past three months, the stock has declined 2.7% to close the last trading session at $28.48.

BAC’s bleak prospects are reflected in its POWR Ratings. It has an overall rating of C, which translates to Neutral in our proprietary rating system.

It is ranked first in the Money Center Banks industry. It has a C grade for Growth, Stability, Sentiment, and Quality. Click here to see BAC’s ratings for Value and Momentum.

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JPM shares were trading at $146.58 per share on Tuesday afternoon, up $2.12 (+1.47%). Year-to-date, JPM has gained 11.74%, versus a 17.72% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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