The road to global deinflation is hitting some obstacles, suggesting that rising interest rates may continue for longer than we would like, a scenario that would be difficult for some but could benefit large U.S. banks such as JPMorgan Chase (JPM), Wells Fargo (WFC), and PNC Financial Services Group (PNC).
These big banks recently reported better-than-expected quarterly results thanks to a recovering economy, strong consumer spending and increased activity on Wall Street.
America's big banks are proving to be resilient, leading the way on everything from Main Street to Wall Street. The U.S. M&A market saw 551 deals worth more than $100 million totaling $758 billion through May, up 18.5% from a year ago, according to consulting firm EY. This surge in M&A is generating huge profits for the banks that advise on these deals.
Meanwhile, the International Monetary Fund (IMF) has warned that persistent inflation could push interest rates higher than expected, increasing fiscal and financial risks worldwide. High services prices and escalating trade tensions are fueling inflation, raising the prospect that interest rates will remain high for the foreseeable future.
Such caution is evident among central banks, including the Federal Reserve, which has been hesitant to cut interest rates until it is confident that inflation is moving sustainably toward its 2% target.
Despite these concerns, the IMF expects major central banks to cut borrowing costs later this year, with one cut from the Fed before the end of the year.Global inflation is forecast to slow to 5.9% this year from 6.7% last year, but persistently high prices for services due to rising wages are slowing inflation progress.
If the Fed cuts interest rates, net interest income could rise in the short term because deposit costs reset faster than some lending rates, but banks would need to issue enough new loans to make up for the lower interest they receive.
Taking these factors into account, let's evaluate the three options for money center banks, starting with the third option.
Stock #3: PNC Financial Services Group (PNC)
PNC is an American diversified financial services company that operates through three segments: Retail Banking, Corporate and Institutional Banking, and Wealth Management Group.
On July 2, the Company's board of directors declared a quarterly common stock dividend of $1.60 per share, an increase of 3% from the previous dividend of $1.55 per share. The dividend is payable on August 5, 2024 to shareholders of record as of the close of business on July 15, 2024.
PNC pays an annual dividend of $6.40 per share, which equates to a yield of 3.62% on the current stock price. The four-year average dividend yield is 3.58%. The company's dividend has also grown at a compound annual growth rate of 9.9% over the past three years. The company has a record of 13 consecutive years of dividend increases.
On May 6, the company announced a partnership with TCW Group, Inc. to provide private credit solutions to middle market companies. The partnership builds on 15 years of joint efforts and combines TCW's direct lending experience with PNC's middle market lending network.
The joint strategy will target senior secured cash flow and asset-backed loans to middle-market companies. Backed by PNC and Nippon Life, the platform aims to secure $2.5 billion in investor capital in the first year, with investments expected to begin in fall 2024.
PNC's revenues for the second quarter ended June 30, 2024 were $5.41 billion, up 2.2% year over year. Net income available to common shareholders was $1.36 billion, or $3.39 per share, up slightly from the same period last year. The company also maintained a strong capital position with a Common Equity Tier 1 (CET1) capital ratio of 10.2% compared to 9.5% in the same period last year.
Analysts expect PNC's third-quarter (ending September 2024) revenue to increase 2.5% year over year to $5.36 billion and EPS to decline 10.2% year over year to $3.23. However, the company has beaten consensus EPS estimates for the past four quarters.
Shares have risen 49.8% over the past nine months, closing at $176.98 in the most recent trading session, and are up 40.7% over the past year.
PNC's stance is clearly visible in its POWR Ratings: the stock has grades of B for Momentum and Stability. POWR Ratings are calculated by considering 118 different factors, each weighted optimally.
It is ranked #4 out of 9 stocks in the Money Center Banks industry. To access PNC's other ratings (Growth, Value, Sentiment, Quality), click here.
#2 Stock: JPMorgan Chase (JPM)
JPM is a global financial services company that operates through four segments: Consumer and Community Banking (CCB), Corporate and Investment Banking (CIB), Commercial Banking (CB) and Asset and Wealth Management (AWM).
On June 28, JPM announced that its board of directors intends to increase the quarterly dividend on its common stock to $1.25 per share in the third quarter of 2024 from the current $1.15 per share. This marks the second dividend increase this year and reflects the company's strong financial performance and continued investment.
JPM pays an annual dividend of $4.60 per share, which equates to a yield of 2.15% based on the current stock price. The four-year average yield is 2.76%. The company's dividend has grown by an average of 6.9% per year over the past three years. JPM has increased its dividend for nine consecutive years.
In addition to the dividend increase, JPM's board of directors authorized a new common share repurchase program worth $30 billion, effective July 1, 2024. The program will enhance the company's ability to flexibly return excess capital to shareholders.
JPM's net revenues for the second fiscal quarter ending June 30, 2024 increased 21.5% year over year to $50.2 billion. Net non-interest income increased 4.4% year over year to $22.75 billion. The company's net income increased 25.4% year over year to $18.15 billion, and earnings per share increased 28.8% year over year to $6.12.
Additionally, return on tangible common equity (ROTCE) for the quarter increased to 28% from 25% a year ago. As of June 30, 2024, JPM had cash and deposits with banks of $22.75 billion, up 4.6% year over year.
The Street expects JPM's third-quarter (ending September 2024) revenue to grow 4.4% year over year to $41.63 billion. However, the current quarter EPS estimate of $3.99 indicates a 7.8% decline year over year. That said, the company has beaten consensus EPS and revenue estimates in three of the past four quarters, which is great to see.
Shares have risen 42.6% over the past year, closing at $213.62 in the last trading session.
JPM's POWR Ratings reflect this outlook: The stock has grades of B for Momentum, Stability and Sentiment, ranking it #2 out of nine peers.
In addition to the POWR Ratings highlighted above, you can access JPM's Growth, Value, and Quality ratings here.
Stock #1: Wells Fargo & Company (WFC)
WFC offers a diversified range of banking, investment, mortgage, consumer and commercial finance products and services in the United States and internationally. The company operates through four segments: Consumer Banking and Lending, Commercial Banking, Corporate and Investment Banking, and Wealth and Investment Management.
In March, the company announced plans to roll out a new electronic foreign exchange (eFX) pricing capability in Singapore in the second half of 2024, with the support of the Monetary Authority of Singapore.
The initiative aims to provide clients with a low-latency trading environment and increase efficiency in the foreign exchange market in Singapore and the Asia-Pacific region. By connecting with more clients and making the pricing and execution of eFX transactions faster and more efficient, WFC aims to improve market efficiency.
For the second quarter ended June 30, 2024, WFC's total revenue increased slightly year over year to $20.69 billion, while net income decreased slightly year over year to $4.91 billion, and earnings per share decreased 6.4% year over year to $1.33. Meanwhile, the company's ROTCE for the second quarter was flat at 13.7% year over year.
Analysts expect WFC's EPS and revenue to decline 3% year over year to $5.09 billion and $82.17 billion, respectively, for the current fiscal year ending December 2024. However, next fiscal year's EPS and revenue are expected to grow 7.5% and 1.1%, respectively, year over year.
WFC shares have risen 44.6% over the past nine months and 22.4% year-to-date, closing the last trading session at $60.24.
WFC's outlook is reflected in its POWR Ratings: the stock has a B grade for Momentum and is ranked #1 in its industry.
To view WFC's additional ratings (Growth, Value, Stability, Sentiment, Quality), click here.
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JPM shares were trading at $216.75 per share on Wednesday afternoon, up $3.13 (+1.47%). Year to date, JPM is up 29.67%, while the benchmark S&P 500 index is up 17.97% over the same period.
About the Author: Shweta Kumari
Shweta's deep interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help individual investors make educated investment decisions. Read more…