After facing a slew of challenges last year, the banking industry is looking forward to lower interest rates by the end of 2024. However, there’s uncertainty over when rate cuts will begin. In other words, there are concerns over the interest rates remaining high for longer, continuing to impact major banks negatively.

Moreover, a sluggish economy, deterioration of asset quality, higher deposit costs, and the likelihood of default on commercial real estate (CRE) loans could put pressure on the U.S. banking system.

Given such gloomy industry prospects, I think M&T Bank Corporation (MTB) is best avoided now, while one could hold on to JPMorgan Chase & Co. (JPM).

Before diving deeper into the fundamentals of these stocks, let’s understand what’s shaping the industry prospects.

The U.S. banking industry faced one of its worst crises in several years when three regional banks collapsed. The sector faced deposit outflows, credit rating downgrades, higher deposit costs, and stringent lending standards. Despite these challenges, the industry showed signs of stability as banks reported solid third-quarter results due to increased write-offs and higher net interest income owing to the highest fed funds rate in 22 years.

Last month, the Federal Reserve held rates steady in a range between 5.25% and 5.5% for the third straight time and indicated that there would be three quarter-percentage-point rate cuts by the end of 2024. However, the recently released Fed minutes suggest that there was no discussion between Fed officials over when the rate cuts could begin, and they kept the option of keeping rates higher in case inflation were to rise again.

The minutes stated, “Participants generally stressed the importance of maintaining a careful and data-dependent approach to making monetary policy decisions and reaffirmed that it would be appropriate for policy to remain at a restrictive stance for some time until inflation was clearly moving down sustainably toward the Committee’s objective.”

The Fed funds futures trading indicates that six quarter-point cuts will be undertaken this year, which would take the Fed funds rate to a range between 3.75% and 4%. The Fed funds rate is expected to fall to around 3% by the end of 2026 before rising back to around 3.5% after that.

Interest rates remaining higher for longer could lead to businesses and consumers borrowing less while banks are forced to pay more for their funding. Moreover, the unrealized losses on their securities portfolio are unlikely to see any material change amid high-interest rates. Additionally, worries about slowing economic growth, the possibility of default on commercial real estate loans, reduced net interest income for banks, and lower credit supply and demand could continue to hurt banks this year.

Considering this backdrop, let's take a look at the fundamentals of the two Money Center Banks stocks, starting with the one ranked lower in our proprietary rating system.

Stock #2: M&T Bank Corporation (MTB)

MTB is a bank holding company. The company’s bank subsidiaries include Manufacturers and Traders Trust Company and Wilmington Trust, N.A. It offers retail and commercial banking and others. Its segments include Business Banking, Commercial Banking, Commercial Real Estate, Discretionary Portfolio, Residential Mortgage Banking, and Retail Banking.

In terms of trailing-12-month non-GAAP P/E, MTB’s 8.78x is 15.9% lower than the 10.45x industry average. Its 0.63x forward non-GAAP PEG is 55.7% lower than the 1.41x industry average. Additionally, its 2.41x forward Price/Sales is 8.9% lower than the 2.64x industry average.

For the third quarter, which ended September 30, 2023, MTB’s net interest income increased 5.7% year-over-year to $1.78 billion. Its net income available to common shareholders rose 6.9% over the prior-year quarter to $664 million. Its EPS came in at $3.98, representing an increase of 12.7% year-over-year. Also, its CET1 ratio came in at 10.94%, compared to 10.75% in the year-ago quarter.

On the other hand, its noninterest income declined 0.5% year-over-year to $560 million. Its provision for credit losses increased 30.4% year-over-year to $150 million. Also, its deposits declined 2.7% year-over-year to $162.69 billion.

Street expects MTB’s EPS and revenue for the quarter ended December 31, 2023, to decline 19.3% and 8.8% year-over-year to $3.64 and $2.29 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has declined 7.2% to close the last trading session at $134.59.

MTB’s grim outlook is reflected in its POWR Ratings. It has an overall rating of D, equating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

It has a D grade for Growth, Sentiment, and Quality. It is ranked #5 out of 9 stocks in the Money Center Banks industry. Click here to see the other ratings of MTB for Value, Momentum, and Stability.

Stock #1: JPMorgan Chase & Co. (JPM)

JPM operates as a financial services company worldwide. It operates through four segments: Consumer & Community Banking (CCB), Corporate & Investment Bank (CIB), Commercial Banking (CB), and Asset & Wealth Management (AWM).

In terms of forward non-GAAP P/E, JPM’s 10.34x is 1% lower than the 10.45x industry average. Its 0.25x trailing-12-month GAAP PEG is 39.3% lower than the 0.41x industry average.

On the other hand, in terms of forward Price/Sales, JPM’s 3.11x is 17.8% higher than the 2.64x industry average. Its 1.68x forward Price/Book is 43.3% higher than the 1.17x industry average.

JPM’s total net revenue - reported for the third quarter ended September 30, 2023, increased 21.9% year-over-year to $39.87 billion. Its net income rose 35.1% year-over-year to $13.15 billion. In addition, its EPS came in at $4.33, representing an increase of 38.8% year-over-year. Its return on common equity (ROE) was 18%, compared to 15% in the year-ago quarter. Also, its CET1 ratio was 14.3%, compared to 12.5% in the prior-year quarter.

Analysts expect JPM’s EPS for the quarter ended December 31, 2023, to decline 0.7% year-over-year to $3.55. Its revenue for the same quarter is expected to increase 15.1% year-over-year to $39.77 billion. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 31.6% to close the last trading session at $171.33.

JPM’s POWR Ratings are consistent with this uncertain outlook. It has an overall rating of C, translating to Neutral in our proprietary rating system.

It is ranked #2 in the same industry. It has a C grade for Growth, Value, Momentum, Stability, Sentiment, and Quality. Click here to see all the ratings of JPM.

What To Do Next?

Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:

10 Stocks to SELL NOW! >

JPM shares were trading at $173.03 per share on Thursday morning, up $1.70 (+0.99%). Year-to-date, JPM has gained 1.72%, versus a -1.11% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

More...