In this article I 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 larger banks? Check out these three stocks: Citigroup
C
ITB
JPM
Big Bank Stocks Recent News
From a broader perspective, there are reasons to maintain a positive outlook on large financial institutions. A consistent decline in the number of banks that started in the 1980s has resulted in a reduction of more than 70% in the number of FDIC-insured commercial banks and displays no indication of halting. The establishment of new banks has dwindled to a point of near insignificance, barely above 0%. Simultaneously, bank consolidations persist at an exceptionally elevated pace in historical terms: An informal report identified 119 announced bank mergers so far this year, as of October 24. As smaller banks struggle to comply with new regulations and address the challenge posed by consumer deposit flight, the banking sector’s concentration intensifies. This scenario may present significant opportunities for large banks.
Over the short term, major U.S. banks anticipate that their net interest income—a crucial revenue stream—will see further expansion in the current year due to the ongoing increase in interest rates. This growth in net interest income is expected to provide a cushion for their overall financial performance, compensating for potential declines in other significant aspects of their business. Net interest income represents the money earned by banks from loans and securities, exceeding the costs associated with their funding. This revenue source has been on an upward trajectory as the Federal Reserve has raised interest rates in response to mounting inflationary pressures.
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, Fifth Third and JPMorgan Chase—based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Big Bank Stocks
What the A+ Stock Grades Reveal
Citigroup (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 for corporate, institutional and public sector clients. 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 98, which is considered deep 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 5.4%, ranking in the 19th percentile. Its price-to-book ratio is 0.40, which ranks in the ninth percentile, and the price-to-sales ratio is 0.62, in the 26th percentile. The price-earnings ratio is 6.2, which translates to a rank of 14.
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 C, which is neutral. 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 third-quarter 2023 of 34.9%, and in the prior quarter reported a positive earnings surprise of 5.6%. Over the last month, the consensus earnings estimate for the fourth quarter of 2023 has increased from $1.143 to $1.149 per share due to seven upward and seven downward revisions. Over the last month, the consensus estimate for full-year 2023 has increased 4.3% from $5.949 to $6.21 per share, based on 10 upward revisions and one downward revision.
Citigroup has a Growth Grade of C, based on a score of 57. Its average five-year sales growth rate is 3.9%. The company has a Momentum Grade of C, with a score of 43. Citigroup has relative price strength below the sector median in the most recent, second-most-recent and third-most-recent quarters. The fourth-most-recent quarter had stronger relative price strength compared to other quarters.
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 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.
Fifth Third has a Quality Grade of B, with a score of 77. The company ranks strongly in terms of its return on invested capital (ROIC) and buyback yield. Fifth Third has a return on invested capital of 59.6%, above the sector median of 40.3%, and a buyback yield of 0.7%. This is partially offset by low accruals to assets of –1.8%, ranking in the 35th percentile of all stocks. The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital, 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 Value Grade of A, based on a score of 85, which is considered to be in the deep-value range. The company ranks in the 14th percentile for shareholder yield and in the 35th percentile for the price-to-book ratio. The company has a shareholder yield of 6.8% and a price-to-book ratio of 1.00. A lower price-earnings ratio is considered a better value, and Fifth Third’s price-earnings ratio is 6.6, which is below the sector median of 10.2. The enterprise-value-to-Ebitda ratio is 8.7, which translates to a rank of 44.
Fifth Third reported a positive earnings surprise for third-quarter 2023 of 10.8%, contributing to its quarterly surprise SUE score of 4.8, ranking in 80th percentile. This compares to the sector median SUE score of 1.8. The previous quarter was less kind to Fifth Third, with a negative earnings surprise of 1.3% giving it a SUE score of 0.7, in the 22nd percentile. Over the last month, the consensus earnings estimate for the fourth quarter of 2023 has increased from $0.789 to $0.854 per share due to 18 upward revisions and one downward revision. Over the last month, the consensus estimate for full-year 2023 has increased 3.8% from $3.229 to $3.353 per share, based on 15 upward revisions and one downward revision.
Fifth Third has a Growth Grade of B, based on a score of 78. The company ranks strongly with its five-year sales growth rate of 8.0%. However, its Momentum Grade is D, from a score of 31. Fifth Third has poor relative price strength in all four recent quarters.
JPMorgan Chase (JPM) is a financial holding company that provides investment banking, financial services and asset management. Its segments are consumer and community banking, corporate and investment bank, commercial banking and asset management and corporate. The consumer and community banking segment serves consumers and businesses through bank branches, automatic teller machines (ATMs), online, mobile and telephone banking. The corporate and investment bank segment, comprising banking and markets and investor services, offers investment banking, market-making, prime brokerage, as well as 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.
JPMorgan Chase has a Quality Grade of C, with a score of 60. The company ranks strongly in terms of its buyback yield and F-Score. JPMorgan Chase has a buyback yield of 0.6% and an F-Score of 5. The sector median buyback yield is 0.1% and the median F-Score is 4. 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, in the 55th and 22nd percentiles, respectively.
The company has a Value Grade of B, based on its Value Score of 66, which is considered in the value range. This is partially based on an enterprise-value-to-Ebitda ratio of 4.5 and a shareholder yield of 3.6%. In addition, JPMorgan Chase has a Growth Grade of B, which is considered strong.
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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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