The Consumer Price Index rose 6.2% in October from a year earlier, its biggest jump in more than 30 years. But while soaring inflation might not negatively impact all sectors equally, some sectors are actually expected to benefit from it.
Due to their rate-sensitive nature, banks tend to benefit when the Fed tightens its monetary policy as an anti-inflationary measure. When interest rates rise, the income on bank assets like bonds and loans climb higher than their liabilities, primarily their deposits. The Fed will likely raise interest rates soon, which could help banks improve their profits. Furthermore, U.S. bank stocks rose recently when senior bankers and industry experts welcomed Federal Reserve Chair Jerome Powell’s nomination for a second term.
Given this backdrop, we think it could be wise to bet on fundamentally strong bank stocks Wells Fargo & Company (WFC) and U.S. Bancorp (USB). However, JPMorgan Chase & Co. (JPM) and Bank of America Corporation (BAC) do not look well-positioned to see their shares soar in the near term. So, these two stocks are best avoided now.
Stocks to Buy:
Wells Fargo & Company (WFC)
WFC provides a diversified set of banking, consumer and commercial finance, investment, and mortgage products and services. It operates through four segments: consumer lending; commercial banking; corporate and investment banking; and wealth and investment management.
On November 8, 2021, WFC announced that it is offering Black Knight’s Servicing Digital solution to its mortgage customers. Joe Nackashi, the President of Black Knight, said, “We are pleased to expand our relationship with Wells Fargo further and deliver solutions that can bring tremendous value to its customer base.”
For its fiscal third quarter, ended September 30, 2021, WFC’s net income increased 59.2% year-over-year to $5.12 billion. The company’s EPS increased 67.1% year-over-year to $1.17. Also, its average deposits increased 4% year-over-year to $1.45 trillion.
Analysts expect WFC’s EPS and revenues for its fiscal year 2021 to increase 1,036.6% and 5.2%, respectively, year-over-year to $4.66 and $76.12 billion It surpassed the Street’s EPS estimates in each of the trailing four quarters. The stock has gained 58.3% year-to-date.
WFC’s POWR Ratings reflect solid prospects. The company has an overall B rating, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.
It has a B grade for Growth, Momentum, and Sentiment. It is ranked #1 of 11 stocks in the Money Center Banks industry. Click here to check the additional ratings of WFC for Value, Stability and Quality.
U.S. Bancorp (USB)
Financial services holding company USB provides various financial services. Its segments include Corporate and Commercial Banking; Consumer and Business Banking; Wealth Management and Investment Services; Payment Services; and Treasury and Corporate Support segments.
On September 21, USB entered an agreement to acquire MUFG Union Bank’s core regional banking franchise for approximately $8 billion. This deal is expected to add more than one million consumer customers and 190,000 small business customers to the company’s portfolio.
USB’s net income increased 28.3% year-over-year to $2 billion for its fiscal third quarter, ended September 30, 2021. The company’s average total deposits increased 6.4% year-over-year to $26 billion. In addition, its EPS increased 31.3% year-over-year to $1.30.
For fiscal year 2021, USB’s EPS is expected to increase 68.3% year-over-year to $5.15. Its revenues for fiscal 2022 are expected to increase 10.6% year-over-year to $25.30 billion. Also, it surpassed the consensus EPS estimates in three of the trailing four quarters. On a year-to-date basis, the stock has gained 18.8% in price.
USB’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which translates to a Buy in our proprietary rating system.
Stocks to Avoid:
JPMorgan Chase & Co. (JPM)
JPM is a financial holding company that does business in investment banking, financial services, and asset management. It operates in the consumer and community bank; corporate and investment bank; commercial and asset management segments.
On November 23, 2021…
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