Big banks should see NII start to improve as the yield curve normalizes.
Big bank stocks typically help kick off earnings season, and so far investors like what they’ve heard from the sector. It started with solid showings from JPMorgan Chase (JPM) and Wells Fargo (WFC 0.77%) in the first week of earnings, and then extended to Bank of America (BAC -0.47%) the next week.
Let’s take a closer look into some key highlights from the recent bank earnings and whether now is the time to buy some of these stocks.
Net interest income
One of the major sources of revenue and profits for banks is net interest income (NII), which is the difference between what the bank earns in interest versus what it pays in interest on its deposits. For the third quarter, this was generally an area of weakness for major banks.
Wells Fargo saw an 11% year-over-year decrease in NII, while Bank of America saw a 3% decline. JPMorgan, meanwhile, squeezed out a 1% NII gain when excluding its markets revenue. However, JPMorgan said it expects a sizable drop in NII next quarter due to changes in the yield curve and a drop in deposits following the Fed interest rate cut. Meanwhile, the company called 2025 analyst estimates for NII a little “toppy.”
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Wells Fargo, however, indicated that NII could have bottomed in Q3, noting that it took pricing actions on deposits to improve its NII. For its part, Bank of America in Q2 previously pointed to an inflection in NII in the second half of next year as some hedges it has in place get factored out.
While NII typically can be pressured as the Fed lowers rates, given that we’ve had an inverted yield curve (where two-year Treasury yields have been higher than 10-year Treasury yields) for quite some time, the normalization of the yield curve should help most big banks moving forward.
Wealth management and investment banking
One area where big banks benefited in Q3 was activities related to the stock market and investment banking.
Wells Fargo saw its Q3 non-interest income rise 12% year over year led by its brokerage division and investment banking. Investment advisory and brokerage fees climbed 11%, while gains from trading activities jumped 14%, and investment banking revenue soared 37%.
Bank of America, meanwhile, saw its Global Wealth and Investment unit increase Q3 revenue by 8% year over year driven by 14% higher asset management fees. Its Global Markets division grew revenue by 14%, led by increased trading revenue and higher investment banking fees.
The trend was similar at JPMorgan, where it saw a 9% year-over-year increase in Q3 revenue at its Asset & Wealth Management unit. Meanwhile, its Commercial & Investment Bank revenue climbed 13%, led by a 29% surge in investment banking revenue and a 27% jump in equity markets revenue.
With the markets hitting all-time highs and the Fed beginning a rate-cutting cycle, this should continue to be an attractive environment for the wealth management and investment banking units of big banks. As stocks go up, their assets under management increase, which draws in more interest in the markets, and a favorable market environment can lead to more investment banking activity through initial public offerings and mergers.
Valuations
One common measure to value bank stocks is price-to-tangible book value (P/TBV), which is essentially the market cap of the company divided by the value of its physical assets. On that front, Wells Fargo and Bank of America Trade at similar 1.6 times multiples, while JPMorgan trades at over 2.4 times.
JPM Price to Tangible Book Value data by YCharts
JPMorgan CEO Jamie Dimon has previously said he thinks his company’s stock is overvalued. Back in May, he said: “Buying back stock of a financial company greatly in excess of two times tangible book is a mistake. We aren’t going to do it.” Now JPMorgan had been buying back stock at the time, but it was an indication the company wouldn’t increase its level of buybacks. That said, the bank turned around in July and boosted its buyback after selling part of its stake in Visa.
At this point, I think the environment for big banks looks favorable with a more normalized yield curve and a strong equity market. However, I’d stick to buying Bank of America and Wells Fargo given their more attractive valuations.
Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America and Visa. The Motley Fool has a disclosure policy.
