Three Big Banks to Watch as Earnings Roll In
This week, we use AAII’s A+ Investor Stock Grades to provide insight into three big bank stocks. With the Federal Reserve raising interest rates at an increasing pace, should you consider the three big bank stocks of Citigroup Inc., JPMorgan Chase & Co. and Truist Financial Corp.?
Big Bank Stocks Recent News
The coronavirus pandemic tested the resilience of banks, and many have come out even stronger than they were before. Deposits across the country remain at historically high levels. To combat inflation reaching a 40-year high, the Federal Reserve has begun and continues to raise interest rates in 2022. Many banks look to benefit from the rising interest rates, which could help net interest margins (NIM) return to pre-pandemic levels. For the nation’s largest banks, the increasingly large interest rate hikes could significantly increase revenue, since the banks can charge more on loans but aren’t likely to pay depositors more. However, the rising interest rates and a more cautious stance by regulators toward household borrowing are likely to slow credit growth, although it is expected to remain higher than pre-pandemic rates across the globe.
In the last year, digital assets have provided an opportunity for growth. As their popularity grows, cryptocurrencies, non-fungible tokens (NFTs) and decentralized finance could disrupt traditional business models. The market capitalization of cryptocurrencies, such as bitcoin, topped $3 trillion in the fourth quarter of 2021. Mass adoption is already happening. More than 20% of investors have digital currencies in their portfolios. A recent survey conducted by Ernst & Young found that 36% of small and midsized businesses accept cryptocurrency and 59% have used it. Partnerships — such as those between payment network GoCrypto and crypto exchange Binance, or payment processor Mastercard and digital asset management platform Bakkt — are likely to boost usage even further.
Banks could look to capitalize on this growth. Some banks, such as Morgan Stanley and JPMorgan have already begun allowing high-net-worth investors to allocate part of their portfolios to cryptocurrencies. Expanding blockchain and cryptocurrency capabilities could provide another source of revenue for banks and one that could be very large and profitable.
Overall, many banks were able to get through the pandemic due to sizable support measures from the federal government and the Fed. The next couple of years will be very important for banks. Rising interest rates could boost revenues for the remainder of the year. Additionally, cryptocurrencies and blockchain provide an incredibly lucrative opportunity for banks. Managing these changing environments will be crucial to the success of banks in the years to come.
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 — Citigroup, JPMorgan Chase and Truist Financial — based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Big Bank Stocks
What the A+ Stock Grades Reveal
Citigroup Inc. (C) is a diversified financial services holding company. The company provides consumer banking and credit, corporate and investment banking, securities brokerage, trade and securities services and wealth management. Its operating business segments include institutional clients group (ICG), personal banking and wealth management (PBWM), legacy franchises and corporate/other. The ICG segment consists of services, markets and banking that provides corporate, institutional and public sector clients with a range of wholesale banking products and services. The PBWM segment provides traditional banking services and credit cards to retail and small business customers in the U.S. Its legacy franchises segment includes Asia consumer banking, Mexico consumer banking/Mexico small business and middle-market banking and legacy holdings assets.
The company has a Value Grade of A, based on its Value Score of 3, which is considered deep value. Lower scores indicate a more attractive stock for value investors and, thus, a better grade.
Citigroup’s Value Score ranking is based on several traditional valuation metrics. The company has a score of 6 for shareholder yield, 9 for the price-to-book-value ratio and 4 for the price-to-free-cash-flow (P/FCF) ratio, with the lower the score the better for value. The company has a shareholder yield of 9.4%, a price-to-book-value ratio of 0.55 and a 1.9 price-to-free-cash-flow ratio. The price-earnings ratio is 6.3, which translates to a score of 15.
The Value Grade is the percentile rank of the average of the percentile ranks of the valuation metrics mentioned above, along with the price-to-sales (P/S) ratio and the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA).
Earnings estimate revisions offer an indication of how analysts view the short-term prospects of a firm. For example, Citigroup has an Earnings Estimate Revisions Grade of B, which is positive. 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.
Citigroup reported a positive earnings surprise for second-quarter 2022 of 36.7%, and in the prior quarter reported a positive earnings surprise of 30.6%. Over the last month, the consensus earnings estimate for the third quarter of 2022 has decreased from $1.625 to $1.574 per share due to five upward and 11 downward revisions. Over the last month, the consensus earnings estimate for full-year 2022 has increased 3.9% from $6.798 to $7.064 per share, based on 15 upward and three downward revisions.
Citigroup has a Growth Grade of D based on a score of 33. The only growth metrics that are above the industry median are quarterly year-over-year sales growth and the five-year diluted earnings per share (EPS) growth rate, at 4.9% and 16.4%, respectively. The company has a Momentum Grade of C, with a score of 55. Citigroup has above-average relative price strength in the first- and fourth-most-recent quarters, but very poor relative price strength in the second- and third-most-recent quarters.
JPMorgan Chase & Co. (JPM) is a financial holding company that provides investment banking, financial services and asset management. Its segments are consumer & community banking, corporate & investment bank, commercial banking and asset management and corporate. The consumer & community banking segment serves consumers and businesses through bank branches, automatic teller machines, online, mobile and telephone banking. The corporate & investment bank segment, comprising banking and markets and investor services, offers investment banking, market-making, prime brokerage and treasury and securities products and services to corporations, investors, financial institutions and government and municipal entities. The commercial banking segment provides financial solutions, including lending, treasury services, investment banking and asset management. The asset management segment comprises investment and wealth management.
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.
JPMorgan has a Quality Grade of C with a score of 60. 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.
The company ranks strongly in terms of its buyback yield and F-Score. JPMorgan has a buyback yield of 3.1% and an F-Score of 6. The industry median buyback yield is 0.0% and the median F-Score is 2. The F-Score is a number between 0 and 9 that assesses the strength of a company’s financial position. It considers the profitability, leverage, liquidity and operating efficiency of a company. The company ranks poorly in terms of its change in total liabilities to assets and accruals to assets with scores of 36 and 38, respectively.
JPMorgan has a Momentum Grade of C, based on its Momentum Score of 47. This means that it is average in terms of its weighted relative strength over the last four quarters. This score is derived from an above-average relative price strength of 10.6% in the fourth-most recent quarter, offset by below-average relative price strength of negative 0.4% in the most recent quarter, negative 13.7% in the second-most-recent quarter and negative 9.8% in the third-most-recent quarter. The scores are 52, 34, 50 and 76 sequentially from the most recent quarter. The weighted four-quarter relative price strength is negative 2.7%, which translates to a score of 47. 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 weighting of 20%.
The company has a Value Grade of A, based on its Value Score of 14, which is considered deep value. This is derived from a low enterprise-value-to-EBITDA ratio of 0.2 and a high shareholder yield of 6.7%. In addition, JPMorgan has a Growth Grade of C, which is considered average. This is derived from a strong operating cash flow five-year growth rate of 29.0% and a strong five-year earnings growth rate of 19.9%. This is offset by low quarterly earnings growth rate of negative 41.5% and low a five-year sales growth rate of 0.7%.
Truist Financial Corp. (TFC) is a financial services company. It operates through its commercial bank subsidiary, Truist Bank. Truist Bank provides a range of banking and trust services for clients and its digital platform. The company’s segments include consumer banking & wealth, corporate & commercial banking and insurance holdings. It provides banking services to commercial and consumer clients, including asset management, automobile lending, credit card lending, consumer finance, home equity lending, insurance, investment brokerage services, mobile/online banking, payment solutions, retail deposit products, small business lending and student lending. Its services also include commercial deposit and treasury services, commercial finance, commercial lending, floor plan lending, leasing, investment banking and capital markets services, institutional trust services, leasing, insurance premium finance and supply chain financing.
Truist Financial has a Quality Grade of B with a score of 77. The company ranks strongly in terms of its return on invested capital and buyback yield. Truist Financial has a return on invested capital of 5,421.2% and a buyback yield of 1.2%. The industry median return on invested capital is 42.4%. This is offset partially by low accruals to assets of negative 0.3%.
Truist Financial has a Value Grade of B based on a score of 31, which is considered to be in the value range. The company has a score of 12 for the shareholder yield and 29 for the price-to-book-value ratio. The company has a shareholder yield of 5.3% and a price-to-book-value ratio of 1.07. A lower price-earnings ratio is considered a better value, and Truist Financial’s price-earnings ratio is 10.5, which is lower than the sector median of 12.2. The enterprise-value-to-EBITDA ratio is 10.1, which translates to a score of 46.
Truist Financial reported a positive earnings surprise for second-quarter 2022 of 11.6%, and in the prior quarter reported a positive earnings surprise of 9.6%. Over the last month, the consensus earnings estimate for the third quarter of 2022 has decreased from $1.170 to 1.155 per share due to four upward and 10 downward revisions. Over the last month, the consensus earnings estimate for full-year 2022 has increased 0.1% from $4.967 to $4.972 per share, based on eight upward and four downward revisions.
Truist Financial has a Growth Grade of C based on a score of 44. The company ranks strongly with its five-year sales growth rate of 14.3% and five-year operating cash flow growth rate of 20.4%. The company has a Momentum Grade of B, with a score of 62. Truist Financial has above-average relative price strength in the third- and fourth-most-recent quarters, offset by below-average relative price strength in the first- and second-most-recent quarters.
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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