MarketPlays: FinancialStocks
Morning Check In
A lot of financial stocks reporting this morning, still to report: , , and
Here's what we've seen so far
Expected EPS: $3.82
Actual EPS: $4.44
Expected EPS: $1.00
Actual EPS: $1.20
Expected EPS: $9.32
Actual EPS: $9.81
How the Banking Sector Works?
MarketPlays: FinancialStocks
Driving the Economy!
The banking sphere assumes a pivotal role in the contemporary economy, functioning as the principal purveyor of credit. It underwrites expenditures such as automobile and residential acquisitions for individuals and facilitates businesses in acquiring equipment, expanding operations, and meeting payroll obligations.
Furthermore, banks afford depositors a secure repository for their finances (particularly since the inception of the Federal Deposit Insurance Corp.), thereby enabling them to accrue interest on their deposits.
The assortment of financial instruments offered by banks—credit cards, debit cards, and checking accounts – streamlines myriad daily transactions. Additionally, they galvanize e-commerce endeavors, where cash transactions hold scant utility. Notably, the banking sector constitutes a substantial source of employment, with FDIC-insured commercial banks alone employing nearly 2 million individuals in the United States by 2023.
Conversely, the banking realm bears the potential for profound economic detriment. The subprime mortgage crisis that erupted in 2007 serves as a poignant example, wherein imprudent lending practices precipitated a recessionary quagmire. Subsequent regulatory reforms aim to preempt analogous crises in the future.
How Are Banks Regulated?
In light of the banking sector's critical import, governments worldwide institute legislative frameworks to curb excessively speculative conduct. In the United States, federal and state entities oversee banking operations, supplemented by self-regulatory initiatives orchestrated by bodies such as the Financial Services Forum and the Financial Services Roundtable.
Federal oversight encompasses entities such as the Federal Reserve System, the Office of the Comptroller of the Currency, and the FDIC. Concurrently, credit unions – within the banking ambit – are subject to oversight by the National Credit Union Administration. State-chartered banks operate under the purview of state regulators and supervisors, with some institutions subject to dual state and federal oversight.
What About the 2023 Banking Crisis?
March 2023 witnessed upheaval within the U.S. banking sector, reverberating across the global financial panorama. Silicon Valley Bank, ranked 16th nationwide, succumbed to insolvency within a matter of days, with Signature Bank and First Republic Bank subsequently faltering—marking the most substantial bank collapses since the 2008 demise of Washington Mutual Bank.
Characterized by substantial deposit outflows, this episode precipitated apprehension regarding the soundness of analogous or smaller banks harboring sizable uninsured deposits, latent losses, and commercial real estate exposures. The March turmoil underscores the perils engendered by constricted monetary and financial conditions, exacerbated by deficiencies in interest, liquidity, and credit risk management protocols at select banks.
In the aftermath of the March 2023 banking imbroglio, which witnessed the demise of four consequential U.S. banks, the banking realm has resurfaced as a potential nexus of concern for investors. Rating agencies have embarked on a downward rating trajectory within the sector, reflecting heightened apprehensions regarding systemic stability.
Royal Bank of Canada: Analysis Q1 2024
The Bank of Canada and the U.S. Federal Reserve escalated interest rates markedly in an attempt to rein in inflation. Elevated interest rates heighten borrowing expenses for households and diminish available cash flow for expenditure on commodities and amenities. The central banks endeavor to temper economic activity and restore equilibrium to the labor market as a mechanism for mitigating upward pressure on prices and wages.
The maneuver appears to be yielding results. In June 2022, inflation soared beyond 8% in Canada. The inflation report for February 2024 revealed a figure of 2.8%, nearing the 2% target.
Market apprehensions regarding a severe recession have also abated. Economists widely anticipate a brief and mild recession for Canada and the U.S. owing to the surge in interest rates. This gentle descent is advantageous for the banks, as it signifies continued business borrowing for expansion, thereby averting a surge in unemployment.
Should the central banks commence lowering rates in the latter half of 2024, there is potential for Royal Bank's stock price to continue its upward drift.
Another boon for Royal Bank stock is the recent finalization of the acquisition of HSBC Canada. This transaction is poised to augment revenue for the year and introduce a network of new branches catering to affluent investors.
Market Info as of 10/04/2024
Market Cap: 193.51 billion CAD
Current Stock Price: 137.38 CAD
52-week range: 140.77 CAD (high) & 107.92 (low)
Earnings Per Share: annual EPS reported on January 31, 2024, was $7.93, a 1.42 percent decline year-over-year
Dividend Yield: 4.02%
Ally Financial Inc.: Analysis Q1 2024
Ally distinguishes itself in the congested financial services landscape as the premier digital bank in the U.S. Despite lacking physical bank branches, which aid in keeping overhead costs minimal, Ally boasts an extensive clientele of 11 million, indicative of its scale.
It is heartening to observe a bank consistently expanding its deposit base, as this constitutes a cost-effective source of funding for loan origination. As of December 31, 2023, Ally reported $142 billion in retail deposits on its balance sheet, marking a year-over-year increase of over 3%. Notably, devoid of branches, Ally can offer savings rates significantly above the industry average.
While Ally's recent investment performance has been modest, as mentioned earlier, investors will appreciate the management's prudent capital allocation strategy. The company presently offers a dividend yield of 3.2%, with the quarterly payout witnessing steady increments over the past eight years.
Additionally, Ally engages in consistent stock repurchases, reducing outstanding shares by more than 4% in 2023 alone. This initiative can enhance earnings per share for existing shareholders.
Market Info as of 10/04/2024
Market Cap: 11.52 billion USD
Current Stock Price: $37.90
52-week range: $41.56 (high) & $22.54 (low)
Earnings Per Share: annual EPS reported on December 31, 2023, was $2.98, a 40.76 percent decline year-over-year
Dividend Yield: 3.17%
JP Morgan Chase: Q1 2024 Analysis
JP Morgan Chase commenced in 2024 with a price of $156.84. Presently, JP Morgan Chase is trading at $194.34, reflecting a 27% increase since the year's inception. Forecasts predict a year-end price of $261 for JP Morgan Chase, translating to a year-over-year change of +66%. The projected rise from the current valuation to year-end stands at +30%.
The preceding year was prosperous for JP Morgan Chase, with the stock yielding a total return exceeding 30%. Despite CEO Jamie Dimon's recurrent expressions of concern regarding macroeconomic conditions and their potential repercussions on the broader stock market, the preeminent Wall Street institution seized opportunities early in the year, solidifying its leadership position within the industry.
Income-oriented investors have long favored JP Morgan due to its commitment to sharing financial gains with shareholders. Notwithstanding extensive stock repurchases, dividend-seeking investors have found solace in the bank's consistent track record. Entering 2024, investor expectations are high for another increment in quarterly dividends.
Market Info as of 10/04/2024
Market Cap: 560.19 billion USD
Current Stock Price: $194.34
52-week range: $200.94 (high) & $126.83 (low)
Earnings Per Share: Basic EPS reported on December 31, 2023, was $16.25, a 34.3% increase year-over-year
Dividend Yield: 2.37%
Mitsubishi UFJ Financial Group Inc.: Q1 2024 Analysis
Mitsubishi UFJ Financial Group Inc. is primarily engaged in financial operations based in Japan. The narrative of 2023 can be summarized as a year marked by resilience, as advanced economies averted sharp downturns despite the rapid tightening of monetary policy. Particularly noteworthy was the buoyant domestic demand in the U.S., which propelled an upswing throughout the year.
Despite this, I believe that current market valuations are excessively sanguine regarding the prospect of rate cuts, notwithstanding our outlook of a soft landing in the U.S. with no imminent recession, albeit an anticipated easing from the Fed, ECB, and BoE in the current year. Furthermore, the company has implemented a share repurchase authorization plan, announcing a ¥400 billion share repurchase program in November 2023, valid from November 15, 2023, to March 31, 2024.
Continuing with the share buybacks, between November 15 and November 30, 2023, the company repurchased 40.2 million shares of its common stock for approximately ¥51 billion. Such strategic initiatives serve to enhance shareholder value and bolster investor confidence in the stock.
Market Info as of 10/04/2024
Market Cap: 18.95 trillion JPY
Current Stock Price: $10.04
52-week range: $10.76 (high) & $5.44 (low)
Earnings Per Share: annual EPS reported on December 31, 2023, was $0.68, a 17.52 percent decline year-over-year
Dividend Yield: 2.38%