We make money, So you don’t have to . .
Fiscal conservatives might be close to an “I told you so” moment. Critics have long blasted the indefinite reign of the U.S. Federal Reserve’s quantitative easing program, which has created a headwind for lending institutions. Notably, Republican presidential hopeful Donald Trump weighed in, accusing the low interest rate environment as being politically motivated. But soon, everyone — even those who haven’t bought into the “Big Four” bank stocks — may be joining the chorus of discontent. With the benchmark 10-year Treasury rates near record lows, that obviously doesn’t leave much profit margin for the big bank stocks. Worse yet, the uncertain nature of the economy is discouraging many folks from borrowing money. But the greater picture is that major bank stocks are literally the lifeblood of all sectors in the economy.
Bank stocks aren’t just isolated to purely financial metrics like interest rates. According to accounting firm Ernst & Young, independent oil and gas companies are the “largest users of-reserve-based lending (RBL) facilities.” RBL’s are an alternative form of financing that involves using an oil company’s undeveloped reserves as collateral. This wasn’t an issue when oil rigs were raking in the money. But with challenged energy prices, smaller oil firms can’t make money, which in turn crimps on the Big Four.
JPMorgan Chase & Co. (NYSE:JPM)
May be the most recognized of the Big Four bank stocks, but that doesn’t mean they can escape the fundamental challenges pressuring the sector. Recently, federal regulators have warned that higher interest rates may be a risk factor, not a panacea. Rising rates would increase profit margins, but also increase the costs associated with servicing debt. With long-term debt and capital lease obligations moving up 14% over the last four years, JPM is hardly immune to this risk. More of the same wouldn’t be the answer for JPM, either. Despite the fact that the current environment favors borrowers, interest income has fallen 9% since fiscal year 2012. Total revenue has declined by nearly 4% over the same time frame, which is problematic. From a technical perspective, JPM clearly has an advantage over the other bank stocks. For one thing, it’s actually in positive territory for the year. But at a modest gain of roughly 2%.
Citigroup Inc (NYSE:C)
Citigroup Inc. has been making the most of its summer rebound. Since crashing hard in late June, C stock is up over 23%, inviting traders into a possible momentum play. Technically, Citigroup Inc. is still very much in bear market territory. Year-to-date, C stock is down 8%, and against its peak price from last year, shares are down nearly 22%. What’s really bothering C stock investors is the lack of substantial loan growth in recent quarters. Also, total revenue is substandard, with the first two quarters of this year averaging losses exceeding 10% year-over-year. Unfortunately, a broad decline in assets from reductions in money market investments and circulating loans means that C stock could continue trading sideways..
Bank of America Corp (NYSE:BAC)
After being left for dead from the aftermath of the subprime mortgage crisis, BAC underwent a remarkable recovery. But that was then, and this is now.. The question is can BAC still generate adequate returns after its second honeymoon phase..? While its other Big Four rivals have middling financial metrics that weigh on them, BAC has to contend with far more serious issues. One of them is profitability margins, which are worse than a majority of publicly traded bank stocks. That’ll hurt more if key interest rates rise. But with total revenue down 7% in the last three years. . The technical picture doesn’t offer any comfort. Sure, BAC stock is up nearly 30% from its June bottom. But despite this massive gain in market value, BAC is still behind the YTD curve by a 6% margin.
Wells Fargo & Co. (NYSE:WFC)
Generally considered the most stable among the Big Four bank stocks due to its diversified business portfolio, While many of its competitors suffered severe repercussions from predatory lending practices, WFC maintained a relatively clean balance sheet. As far as bank stocks are concerned, WFC is hitting the right buttons. Interest income has steadily risen over the three years. In the most recent quarter, it jumped to nearly 8% against the year-ago level. Net loan growth is also very impressive, jumping 12% since FY 2013. Furthermore, money market investments have gained 26% over the same time frame. But rapidly rising debt levels are a risk factor, considering recent hawkish comments from the Fed. WFC stock can’t seem to break out of its horizontal trend channel.here’s no doubt that if you had to buy one of the bank stocks, WFC would be it.
at moment of writing J. Mason did not hold any of the above mentioned securities.