Two bank stocks to buy and one to hang on to
19th April 2023 08:42
by Rodney Hobson from interactive investor
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We’ve already seen broadly positive results from the bank sector, but there are still opportunities to get in at a good price, argues overseas investing expert Rodney Hobson.
Investors’ nerves have been eased if not entirely assuaged by early first-quarter results from American banks. Figures are better than analysts expected so the positives far outweigh concerns about the state of the banking sector.
As usual, quality is what counts as banks cope with fewer issues than during the previous crisis in 2008, and there are fewer potential basket cases to drag down national economies.
Figures for major United States banks, as for their British counterparts, come out ahead of the rest of the pack of company results, so they are always watched with particular interest. First-quarter figures were especially important because they followed the collapse of tech bank Silicon Valley Bank, and then the demise of Signature Bank that sparked fears of wider contagion in the sector.
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Such concerns appeared justified when Credit Suisse ran into problems and was rescued in a deal engineered by the Swiss government. However, Credit Suisse was, like SVB, a special case with mistaken decisions dating back over several years finally taking their toll.
Major American banks look to be on firmer ground thanks mainly to the extra profits created by higher interest rates. In a great start to the reporting season, JPMorgan Chase & Co (NYSE:JPM) recorded revenue up 25% to a record $39.3 billion and net income up 52% to $12.6 billion.
See Keith Bowman’s analysis ii view: banking mammoth JP Morgan reports record revenue
JPMorgan shares jumped on the results, but they are still below the peak of $144 recorded several times in January and February. These could be the results that break the ceiling. The price/earnings (PE) ratio still does not fully reflect the improved prospects at 10.2, while the dividend is reasonable at 2.9%.
Source: interactive investor. Past performance is not a guide to future performance.
Citigroup Inc (NYSE:C) produced less spectacular figures but still impressed, with the fixed income arm performing particularly well. Revenue climbed 12% to $21.45 billion and net income 7.0% to $4.61 billion. Significantly, banking activity picked up from the end of 2022.
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As at JPMorgan, the shares have recovered somewhat after a poor start to the year but remain below recent highs. The PE ratio is remarkably low at 6.8 while the yield is quite attractive at 4.1%.
Source: interactive investor. Past performance is not a guide to future performance.
Wells Fargo & Co (NYSE:WFC), which has been seen to struggle in recent years, was the surprise package out of the trio announcing results together. Revenue rose 16.9% to $20.7 billion and profits jumped 31.8% to $4.99 billion. Even so, the immediate reaction on the stock market was muted.
The shares remain well below their February level. Even though the yield at 2.78% is not far short of JPMorgan’s, Wells Fargo is seen as more vulnerable to possible credit failures.
Source: interactive investor. Past performance is not a guide to future performance.
Inflation in the US, as elsewhere, will prove difficult to control, but the worst of the interest rate rises are over. Although that means a limit on the extent to which banks can count on continuing rises in income and profits, it does also reduce the risk of company and individual defaults that would force banks to set aside onerous provisions.
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US Treasury Secretary Janet Yellen, previously head of the Federal Reserve Bank, reckons the US economy will continue to grow, that the labour market will remain strong and that inflation will come down. While as a government official she has a bias towards optimism, all the signs so far are that she will be proved right.
Hobson’s choice: Buy JPMorgan below $145. The shares topped $170 in October 2021 and could well do so again. Citigroup remains a buy at least up to $54. I have tipped both several times and any investor who took my advice in March to put them in an ISA portfolio is already ahead.
I remain doubtful about Wells Fargo although the shares probably deserve a hold rating at current levels.
Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.
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