Large Banks May Be Poised for Success in Today’s Market
This week, we use AAII’s A+ Investor Stock Grades to provide insight into three big bank stocks. Amid the challenges small banks face, is it time to consider the larger bank stocks of Bank of America Corp. (BAC), Fifth Third Bancorp (FITB) and Wells Fargo & Co. (WFC)?
Big Bank Stocks Recent News
Global bank mergers and acquisitions (M&A) hit their lowest level in five years in 2023, with a total deal count of 291, according to data from S&P Global Market Intelligence. North American banking experienced the largest decline in deals last year with only 117, which was 42.1% less than 2022. The U.S. banking industry had its lowest level of deals in over a decade with only 98 deal announcements in 2023, according to S&P Global Market Intelligence data. However, acquisition deals worth approximately $854.6 million were announced in January 2024 by 10 U.S. banks.
If interest rates are lowered as expected in 2024, the financial sector could see an uptick in M&A activity. At the first meeting of the Federal Open Market Committee (FOMC) this year on January 31, 2024, interest rates were held steady at a target range of 5.25% to 5.50%. The FOMC will have another opportunity to cut interest rates at its next meeting on March 19 and 20. Inflation has seen some decline, but the committee wants to see more positive results before lowering interest rates.
As smaller banks struggle to comply with new regulations and address the challenges posed by consumer deposit flight, concentration in the banking industry intensifies. This scenario presents significant opportunities for large banks.
Grading Big Bank Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is why AAII created the A+ Stock Grades, which evaluate companies across five factors that research and real-world investment results indicate to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three big bank stocks — Bank of America, Fifth Third and Wells Fargo — based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Big Bank Stocks
What the A+ Stock Grades Reveal
Bank of America Corp. (BAC) is a bank holding company and a financial holding company. Its segments include consumer banking, global wealth and investment management (GWIM), global banking and global markets. The consumer banking segment offers a range of credit, banking and investment products and services to consumers and small businesses. The GWIM segment includes two businesses: Merrill Lynch Wealth Management — which provides tailored solutions to meet clients’ needs through a full set of investment management, brokerage, banking and retirement products — and Bank of America Private Bank, which provides comprehensive wealth management solutions. The global banking segment provides a range of lending-related products and services, integrated working capital management and treasury solutions and underwriting and advisory services. The global markets segment offers sales and trading services and research services to institutional clients across fixed-income, credit, currency, commodity and equity businesses.
The company has a Value Grade of B, based on its Value Score of 76, which is considered good value. Higher scores indicate a more attractive stock for value investors and thus a better grade. The Value Grade is the percentile rank of the average of the percentile ranks of the price-to-sales (P/S) ratio, price-earnings (P/E) ratio, price-to-book-value (P/B) ratio, price-to-free-cash-flow (P/FCF) ratio, shareholder yield and the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA).
The company has a shareholder yield of 3.9%, ranking in the 22nd percentile. Its price-to-free-cash-flow ratio is 7.7 and its price-to-sales ratio is 2.09, ranking in the 22nd and 58th percentiles, respectively. The price-earnings ratio is 11.0, which translates to a rank of 29.
Earnings estimate revisions indicate how analysts view a firm’s short-term prospects. Bank of America has an Earnings Estimate Revisions Grade of D, based on a score of 39, which is negative. The grade is based on the statistical significance of its latest two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
Bank of America reported a positive earnings surprise for fourth-quarter 2023 of 2.6%, and in the prior quarter it reported a positive earnings surprise of 10.0%. Over the last month, the consensus earnings estimate for the first quarter of 2024 has stayed at relatively the same level, from $0.782 per share to the current $0.775 per share due to six upward and five downward revisions. Over the last month, the consensus estimate for full-year 2024 has decreased slightly from $3.149 to $3.138 per share, based on two upward and 19 downward revisions.
The company has a Momentum Grade of C, with a score of 58. This means that it is average in terms of its weighted relative price strength over the last four quarters. This score is derived from above-sector-median relative price strengths of 2.8% in the most recent quarter, 0.3% in the second-most-recent quarter and –1.3% in the third-most-recent quarter, offset by a below-sector-median relative price strength of –22.6% in the fourth-most-recent quarter. The scores are 66, 70, 60 and 33, sequentially from the most recent quarter. The weighted four-quarter relative price strength is –3.6%, which translates to a score of 58. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weight of 20%.
Fifth Third Bancorp (FITB) is a bank holding company for Fifth Third Bank. The company conducts its principal lending, deposit gathering, transaction processing and service advisory activities through its banking and nonbanking subsidiaries from banking centers located throughout the Midwestern and Southeastern regions of the U.S. It operates through three segments: commercial banking, which offers credit intermediation, cash management and financial services to large and middle market businesses and government and professional customers; consumer and small business banking, which provides a full range of deposit and loan products to individuals and small businesses through a network of full-service banking centers and relationships with indirect and correspondent loan originators; and wealth and asset management, which provides a range of wealth management services for individuals, companies and nonprofit organizations.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the Quality Grade shows that stocks with higher grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.
The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a Quality Score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
Fifth Third has a Quality Grade of B, with a score of 71, which is strong. The company ranks strongly in terms of its return on invested capital and buyback yield. Fifth Third has a return on invested capital of 57.5%, above the sector median of 39.2%, and a buyback yield of 0.7%. This is partially offset by low accruals to assets of –1.0%, ranking in the 29th percentile of all stocks.
Fifth Third has a Value Grade of B, based on a score of 68, which is considered good value. The company ranks in the 18th percentile for shareholder yield and in the 48th percentile for the price-to-book ratio. The company has a shareholder yield of 4.9% and a price-to-book ratio of 1.60. A lower price-earnings ratio is considered a better value, and Fifth Third’s price-earnings ratio is 10.5, which is below the sector median of 12.2. The enterprise-value-to-EBITDA ratio is 9.7, which translates to a rank of 49.
The components of the Growth Composite Score consider a company’s success in growing sales on a year-over-year and long-term annualized basis and its ability to consistently generate positive cash from its core operations. Fifth Third has a Growth Grade of B, based on a score of 79. The company ranks strongly with its five-year annualized sales growth rate of 8.0%, ranking in the 87th percentile of all stocks.
Wells Fargo & Co. (WFC) is a financial services company. It provides a diversified set of banking, investment and mortgage products and services, as well as consumer and commercial finance. Its services are distributed through banking locations and offices, the internet and other channels to individuals, businesses and institutions in the U.S. and countries outside the U.S. The company provides consumer financial products and services, including checking and savings accounts; credit and debit cards; auto, mortgage and home equity; and small business lending. In addition, it offers financial planning, private banking, investment management and fiduciary services. It also provides financial solutions to businesses through products and services, including traditional commercial loans and lines of credit, letters of credit, asset-based lending, trade financing, treasury management and investment banking services.
Wells Fargo has a Quality Grade of B, based on a score of 79, which is strong. The company ranks strongly in terms of its buyback yield and return on invested capital. Its buyback yield of 3.9% ranks in the 88th percentile, and its return on invested capital of 48.3% ranks in the 83rd percentile. Wells Fargo also has a strong F-Score of 7, ranking in the 84th percentile.
Wells Fargo has a Momentum Grade of B, with a score of 71, which is strong. This score is derived from above-sector-median relative price strengths of 9.3% in the most recent quarter, –1.4% in the second-most-recent quarter and 1.0% in the third-most-recent quarter, offset by a below-sector-median relative price strength of –18.0% in the fourth-most-recent quarter. The scores are 76, 65, 66 and 40, sequentially from the most recent quarter. The weighted four-quarter relative price strength is 0.1%, which translates to a score of 71.
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The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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