Higher inflation risk yields higher interest rate hike risk, which is beneficial for the largest banks.
As banks release their earnings this month, macroeconomists adjust their forecasts. Given that banks regulate the flow of money from the Federal Reserve, their lending and credit activities shift investor sentiment on the economy’s overall health.
Although JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC) beat Q1 ‘24 earnings forecasts, JPMorgan’s less-than-optimistic outlook concerning inflation suppressed banking stocks. The bank expects $90 billion in net interest income for 2024, effectively flatlining from the previously expected extra $2 – 3 billion.
Extra Padding Needed Despite Good Results
Given the threat from the commercial real estate (CRE) looming over the sector, as office vacancy rose to a record-breaking 19.6% in Q4 ‘23, extra padding is now in investor focus. Fed Chair Jerome Powell noted in March that CRE is “perhaps the most salient risk to the financial system.”
However, Powell also noted that CRE risk is primarily concentrated in smaller to medium-sized banks expecting “losses by some banks.” For investors, this translates to holding more extensive bank stocks as they will likely absorb another round of regional banks’ assets and obligations.
To that end, which banking stocks are best positioned to weather financial pain ahead?
1. Berkshire Hathaway
Although Warren Buffett’s investing conglomerate is not a bank, its portfolio is heavily exposed to the financial sector, from Bank of America (13%) and Ally Financial (NYSE:ALLY) (9.6%) to Capital One (3.3%), Citigroup (2.9%) and Nu Holdings (2.3%).
Although some of these are smaller institutions, they are more diversified against CRE risk in the US. Case in point: As a disruptive financial platform in Latin America, Nu Holdings (NU) has outperformed both Bank of America (BAC) and Berkshire Hathaway B (NYSE:BRKb) at 40% YTD returns.
At the same time, Berkshire outperformed its largest banking stake, BAC, at 5.8% vs $11.6% respectively year-to-date. In its annual 2023 report, Berkshire reported $51.17 billion in net unrealized gains from the banking, finance, and insurance sectors. This is up 17.2% from 2022.
Considering Berkshire’s entire portfolio, BRK.B remains one of the safest investing exposures, outperforming larger banks and the broader S&P 500 (SPX) market benchmark.
According to WSJ, the average BRK.B price target is now $453.61 vs the current $404.20 per share, giving potential 12% returns. Mirroring its safer exposure, BRK.B low price target is also above the current level, at $430.22 per share.
2. Wells Fargo & Company
Since the Wells Fargo coverage in January, WFC stock is up 18%, from $48 to the current $56.62 per share. Belonging to the family of globally systemically important banks (G-SIBs), the institution performed well in its latest earnings report for Q1 2024.
In line with its guidance, the bank’s income from interest decreased 8% for the quarter as customers sought higher-yielding deposit platforms such as Certificates of Deposit (CDs). However, Wells’ overall revenue increased to $20.86 billion vs. $20.20 billion forecasted by LSEG. Likewise, the bank’s earnings per share outperformed the expected $1.11 vs. $1.26 reported.
The bank’s CEO, Charlie Scharf, noted that an “increase in noninterest income more than offset an expected decline in net interest income.” Specifically, Wells’ noninterest income was up 17% to $8.6 billion from a year-ago quarter. For the full-year 2024, the bank is not expecting surprises, remaining at a 7-9% lower net interest income forecast from 2023, which was reported at $52.4 billion.
From the prior quarter of Q4 2023, Wells also managed to lower noninterest expenses by 9% ($1.4 billion), which offset the $633 million in operating losses. Twelve months ahead, the average WFC price target is $59.81 vs. the current $56.62, per Nasdaq’s aggregation. However, WFC is also a dividend stock, having lifted its dividend payout on an annual average by 3.4% over the last ten years, yielding 2.47% at $1.40 annual payout per share.
3. JPMorgan Chase
Investors should do the same, staying in close shadow of the Federal Reserve’s size and importance. JPM stock took a weekly plunge of 6.4% but closely tracked the SPX benchmark at 7.6% vs. 8.6% YTD respectively. This is without accounting for the bank’s annual dividend payout of $4.60 per share.
JPMorgan CEO Jamie Dimon noted in his annual shareholder letter that the bank is readying for an even greater interest rate range, from the present 5.25 – 5.50% up to 8%. Dimon speculated that the Fed would do so under the confluence of inflationary drivers:
“All of the following factors appear to be inflationary: ongoing fiscal spending, remilitarization of the world, restructuring of global trade, capital needs of the new green economy, and possibly higher energy costs,”
JPMorgan reported an 8.7% quarterly revenue increase to $41.9 billion, with net income up 6.3% to $13.4 billion from a year-ago quarter, beating Wall Street consensus. Despite migratory trends to higher-yielding deposit products, the bank’s net interest income was up 11% to $23.2 billion, or 5%, without the First Republic.
For 2024, JPMorgan still elevated its net interest income outlook to $89 billion, one billion higher than the previous projection but not as high as investors expected. Now slightly discounted at $184.89, the average JPM price target is $204.53 twelve months ahead, per Nasdaq data. The lowest estimate is $160, vs. the highest of $229 per share.
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Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.
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