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Zacks Industry Outlook Highlights JPMorgan Chase, The Bank of New York Mellon and Northern Trust
Read MoreHide Full Article
For Immediate Release
Chicago, IL – February 7, 2024 – Today, Zacks Equity Research discusses JPMorgan Chase & Co. (JPM - Free Report) , The Bank of New York Mellon Corp. (BK - Free Report) and Northern Trust Corp. (NTRS - Free Report) .
The Zacks Major Regional Banks will benefit from high rates as net interest income (NII) continues to rise, despite increasing funding costs and weakening loan demand putting a strain on net interest margin (NIM) expansion. Solid economic growth will also support banks’ financials in the near term.
Business restructuring/expansion initiatives and digitization will offer support. While weakening asset quality is now likely to exert some pressure on the financials, major banks like JPMorgan Chase & Co., The Bank of New York Mellon Corp. and Northern Trust Corp. are worth betting on.
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.
Themes to Influence the Major Regional Banks Industry
High-Interest Rates: The Fed’s aggressive monetary policy since March 2022 has led the rates to touch a 22-year high of 5.25-5.5% as it continues to fight ‘sticky’ inflation. With the inflation numbers coming down, the Fed officials have signaled the end of rate hikes this cycle and three interest rate cuts later this year. While the market participants were betting on rate cuts as early as March, Fed Chairman Jerome Powell put down such prospects with a message that the central bank will tread carefully on the timing of rate cuts.
While the faster pace of rate hikes puts pressure on major banks’ NIM because of an increase in funding costs, high rates for longer periods will be a boon for the industry players on the back of solid economic growth, resilient consumers and decent deposit inflows. This will support banks’ NII growth.
Business Restructuring Initiatives: Major regional banks are taking several strategic actions to expand into new avenues and lower their dependence on spread income. The 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.
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 Europe and Asia. Several industry players are re-evaluating their business structure to simplify operations and do away with unprofitable ones.
Waning Loan Demand: The central bank’s aggressive monetary policy lowered the demand for loans due to fears of an economic downturn. Further, the Fed’s latest Summary of Economic Projections indicates that the U.S. economy will slow down this year and grow at a rate of 1.4%. In 2023, the U.S. economy grew at a rate of 2.5%, per the data released by the Bureau of Economic Analysis. The high interest rates are keeping the borrowers on the sidelines. Hence, the lending backdrop is expected to be subdued as the demand for loans continues to wane.
Weakening Asset Quality: 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 COVID-19 mayhem. This considerably hurt their financials. But with solid economic growth and support from government stimulus packages, banks began to release these reserves back into the income statement.
Now, given the current macroeconomic headwinds, industry players are building provisions to counter any adverse fallout. While conservative lending policy and the resilience of borrowers helped banks to keep their asset quality manageable, several metrics have started rising. This, thus, signals the gradual deterioration of the industry players’ asset quality.
Zacks Industry Rank Suggests 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 #33, which places it in the top 13% 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 outperformance 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 top 50% of the Zacks-ranked industries is a result of an encouraging earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. Since the end of the third quarter of 2023, the industry’s earnings estimates for the current year have been revised 1.4% upward.
Before we present a few major bank stocks that are worth considering, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Underperforms the Sector and the S&P 500
The Zacks Major Regional Banks industry has widely underperformed both the S&P 500 composite and its sector over the past three years. While stocks in this industry have collectively gained 9.7% over the period, the Zacks S&P 500 composite has jumped 25.4%, and the Zacks Finance sector has rallied 17.1%.
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 1.82X. This compares with the highest level of 2.48X, the lowest of 1.21X and the median of 1.95X 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 10.80X.
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. However, 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 4.75X. This is way above the Zacks Major Regional Banks industry’s ratio.
3 Major Regional Banks to Bet On
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 (though now the funding costs will put some strain), decent loan growth, strategic buyouts, business diversification efforts, a strong liquidity position and initiatives to expand the branch network in new markets.
Last 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 immensely benefited the company’s financials in 2023 and helped record the biggest annual profits in its history.
This Zacks Rank #2 (Buy) lender has been growing through on-bolt acquisitions, both domestic and international. These are expected to keep aiding its plan to diversify revenues and expand the fee income product suite and consumer bank digitally.
Also, JPMorgan is expanding its footprint in new regions and has a presence in 48 of 50 U.S. states. It intends to expand its retail branches further. The strategy continues to help the bank grab cross-selling opportunities by increasing its presence in the card and auto loan sectors. Also, the company launched its digital retail bank Chase in the U.K. in 2021 and plans to expand its reach across European Union countries.
With a market cap of $502.6 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 2% upward for 2024 in the past month. The stock has rallied 11.4% in the past six months.
BNY Mellon: Operating in 35 countries, BNY Mellon provides various products and services to individuals and institutions. Its global client base consists of financial institutions, corporations, government agencies, endowments and foundations, and high-net-worth individuals.
Higher interest rates will support BNY Mellon’s top-line growth. While the company’s NIR and net interest margin (NIM) declined in 2020 and 2021, both rebounded solidly thereafter. NIR recorded a five-year (ended 2023) CAGR of 3.8%. Though a rise in funding costs will likely weigh on NIR, the metric is anticipated to keep improving in the quarters ahead, driven by the high interest rate regime.
This Zacks Rank #1 (Strong Buy) company has been trying to gain a foothold in foreign markets and is undertaking several growth initiatives (including launching new services, digitizing operations and making strategic buyouts). In 2023, non-U.S. revenues constituted 36% of total revenues. Its international revenues are expected to continue improving as the demand for personalized services rises globally. You can see the complete list of today’s Zacks #1 Rank stocks here.
Following the clearance of the 2023 stress test, the company hiked its quarterly cash dividend by 14% to 42 cents per share. BK announced a share buyback program worth $5 billion, effective Jan 1, 2023. As of Dec 31, 2023, nearly $2.4 billion worth of buyback authorization remained. The company expects to return 100% or more of its earnings to shareholders in 2024 after having returned 123% last year. Driven by a strong capital position and earnings strength, the company is expected to sustain efficient capital distributions.
BNY Mellon has a market cap of $42.8 billion. Over the past 30 days, the Zacks Consensus Estimate for earnings has moved 4.8% upward for 2024. In the past six months, the stock has gained 18.8%.
Northern Trust: With total assets worth $150.8 billion as of Dec 31, 2023, Northern Trust is a leading provider of wealth management, asset servicing, asset management and banking solutions to corporations, institutions, families and individuals.
Organic growth is the company’s key strength. Its revenues witnessed a CAGR of 3.5% over the last three years (2020-2023), driven by rising non-interest income and NII. The growth of NII was aided by an improvement in loan balances and higher rates. Also, robust pipelines in the Asset Servicing and Wealth Management segments will likely drive organic growth in the upcoming period.
NTRS is undertaking expense management efforts to tackle expense growth and reinstate its operating leverage. It focused on disciplined headcount management, vendor consolidation, rationalization of its real estate footprint and process automation. Through such efforts, it will likely improve productivity and meet the financial targets.
This Zacks Rank #2 company’s capital distributions seem impressive. In 2022, the company hiked its quarterly dividend by 7% to 75 cents per share. In 2021, the company announced a 25-million share repurchase program with no expiration date. Its debt/equity ratio, comparing favorably with the broader industry, and decent liquidity highlight the fact that such capital-distribution activities are sustainable in the future.
NTRS has a market cap of $16.6 billion. Analysts are bullish on the stock. In the past 30 days, the Zacks Consensus Estimate for earnings has been revised 8.9% upward for 2024. The stock, which currently carries Zacks Rank #2, has dipped 2.6% over the past six months.
Why Haven’t You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
Join us on Facebook: https://www.facebook.com/ZacksInvestmentResearch/ Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
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/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights JPMorgan Chase, The Bank of New York Mellon and Northern Trust
For Immediate Release
Chicago, IL – February 7, 2024 – Today, Zacks Equity Research discusses JPMorgan Chase & Co. (JPM - Free Report) , The Bank of New York Mellon Corp. (BK - Free Report) and Northern Trust Corp. (NTRS - Free Report) .
Industry: Regional Banks
Link: https://www.zacks.com/commentary/2221574/3-major-regional-banks-to-buy-on-economic-growth-high-rates
The Zacks Major Regional Banks will benefit from high rates as net interest income (NII) continues to rise, despite increasing funding costs and weakening loan demand putting a strain on net interest margin (NIM) expansion. Solid economic growth will also support banks’ financials in the near term.
Business restructuring/expansion initiatives and digitization will offer support. While weakening asset quality is now likely to exert some pressure on the financials, major banks like JPMorgan Chase & Co., The Bank of New York Mellon Corp. and Northern Trust Corp. are worth betting on.
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.
Themes to Influence the Major Regional Banks Industry
High-Interest Rates: The Fed’s aggressive monetary policy since March 2022 has led the rates to touch a 22-year high of 5.25-5.5% as it continues to fight ‘sticky’ inflation. With the inflation numbers coming down, the Fed officials have signaled the end of rate hikes this cycle and three interest rate cuts later this year. While the market participants were betting on rate cuts as early as March, Fed Chairman Jerome Powell put down such prospects with a message that the central bank will tread carefully on the timing of rate cuts.
While the faster pace of rate hikes puts pressure on major banks’ NIM because of an increase in funding costs, high rates for longer periods will be a boon for the industry players on the back of solid economic growth, resilient consumers and decent deposit inflows. This will support banks’ NII growth.
Business Restructuring Initiatives: Major regional banks are taking several strategic actions to expand into new avenues and lower their dependence on spread income. The 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.
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 Europe and Asia. Several industry players are re-evaluating their business structure to simplify operations and do away with unprofitable ones.
Waning Loan Demand: The central bank’s aggressive monetary policy lowered the demand for loans due to fears of an economic downturn. Further, the Fed’s latest Summary of Economic Projections indicates that the U.S. economy will slow down this year and grow at a rate of 1.4%. In 2023, the U.S. economy grew at a rate of 2.5%, per the data released by the Bureau of Economic Analysis. The high interest rates are keeping the borrowers on the sidelines. Hence, the lending backdrop is expected to be subdued as the demand for loans continues to wane.
Weakening Asset Quality: 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 COVID-19 mayhem. This considerably hurt their financials. But with solid economic growth and support from government stimulus packages, banks began to release these reserves back into the income statement.
Now, given the current macroeconomic headwinds, industry players are building provisions to counter any adverse fallout. While conservative lending policy and the resilience of borrowers helped banks to keep their asset quality manageable, several metrics have started rising. This, thus, signals the gradual deterioration of the industry players’ asset quality.
Zacks Industry Rank Suggests 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 #33, which places it in the top 13% 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 outperformance 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 top 50% of the Zacks-ranked industries is a result of an encouraging earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. Since the end of the third quarter of 2023, the industry’s earnings estimates for the current year have been revised 1.4% upward.
Before we present a few major bank stocks that are worth considering, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Underperforms the Sector and the S&P 500
The Zacks Major Regional Banks industry has widely underperformed both the S&P 500 composite and its sector over the past three years. While stocks in this industry have collectively gained 9.7% over the period, the Zacks S&P 500 composite has jumped 25.4%, and the Zacks Finance sector has rallied 17.1%.
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 1.82X. This compares with the highest level of 2.48X, the lowest of 1.21X and the median of 1.95X 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 10.80X.
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. However, 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 4.75X. This is way above the Zacks Major Regional Banks industry’s ratio.
3 Major Regional Banks to Bet On
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 (though now the funding costs will put some strain), decent loan growth, strategic buyouts, business diversification efforts, a strong liquidity position and initiatives to expand the branch network in new markets.
Last 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 immensely benefited the company’s financials in 2023 and helped record the biggest annual profits in its history.
This Zacks Rank #2 (Buy) lender has been growing through on-bolt acquisitions, both domestic and international. These are expected to keep aiding its plan to diversify revenues and expand the fee income product suite and consumer bank digitally.
Also, JPMorgan is expanding its footprint in new regions and has a presence in 48 of 50 U.S. states. It intends to expand its retail branches further. The strategy continues to help the bank grab cross-selling opportunities by increasing its presence in the card and auto loan sectors. Also, the company launched its digital retail bank Chase in the U.K. in 2021 and plans to expand its reach across European Union countries.
With a market cap of $502.6 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 2% upward for 2024 in the past month. The stock has rallied 11.4% in the past six months.
BNY Mellon: Operating in 35 countries, BNY Mellon provides various products and services to individuals and institutions. Its global client base consists of financial institutions, corporations, government agencies, endowments and foundations, and high-net-worth individuals.
Higher interest rates will support BNY Mellon’s top-line growth. While the company’s NIR and net interest margin (NIM) declined in 2020 and 2021, both rebounded solidly thereafter. NIR recorded a five-year (ended 2023) CAGR of 3.8%. Though a rise in funding costs will likely weigh on NIR, the metric is anticipated to keep improving in the quarters ahead, driven by the high interest rate regime.
This Zacks Rank #1 (Strong Buy) company has been trying to gain a foothold in foreign markets and is undertaking several growth initiatives (including launching new services, digitizing operations and making strategic buyouts). In 2023, non-U.S. revenues constituted 36% of total revenues. Its international revenues are expected to continue improving as the demand for personalized services rises globally. You can see the complete list of today’s Zacks #1 Rank stocks here.
Following the clearance of the 2023 stress test, the company hiked its quarterly cash dividend by 14% to 42 cents per share. BK announced a share buyback program worth $5 billion, effective Jan 1, 2023. As of Dec 31, 2023, nearly $2.4 billion worth of buyback authorization remained. The company expects to return 100% or more of its earnings to shareholders in 2024 after having returned 123% last year. Driven by a strong capital position and earnings strength, the company is expected to sustain efficient capital distributions.
BNY Mellon has a market cap of $42.8 billion. Over the past 30 days, the Zacks Consensus Estimate for earnings has moved 4.8% upward for 2024. In the past six months, the stock has gained 18.8%.
Northern Trust: With total assets worth $150.8 billion as of Dec 31, 2023, Northern Trust is a leading provider of wealth management, asset servicing, asset management and banking solutions to corporations, institutions, families and individuals.
Organic growth is the company’s key strength. Its revenues witnessed a CAGR of 3.5% over the last three years (2020-2023), driven by rising non-interest income and NII. The growth of NII was aided by an improvement in loan balances and higher rates. Also, robust pipelines in the Asset Servicing and Wealth Management segments will likely drive organic growth in the upcoming period.
NTRS is undertaking expense management efforts to tackle expense growth and reinstate its operating leverage. It focused on disciplined headcount management, vendor consolidation, rationalization of its real estate footprint and process automation. Through such efforts, it will likely improve productivity and meet the financial targets.
This Zacks Rank #2 company’s capital distributions seem impressive. In 2022, the company hiked its quarterly dividend by 7% to 75 cents per share. In 2021, the company announced a 25-million share repurchase program with no expiration date. Its debt/equity ratio, comparing favorably with the broader industry, and decent liquidity highlight the fact that such capital-distribution activities are sustainable in the future.
NTRS has a market cap of $16.6 billion. Analysts are bullish on the stock. In the past 30 days, the Zacks Consensus Estimate for earnings has been revised 8.9% upward for 2024. The stock, which currently carries Zacks Rank #2, has dipped 2.6% over the past six months.
Why Haven’t You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
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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/performance for information about the performance numbers displayed in this press release.