The best US bank to invest in: what to learn from Q2 results

After a flurry of recent earnings reports, what is the best US bank to invest in? We take a look

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Finding the best US bank to invest in can be a challenging prospect. It involves taking an in-depth look at their balance sheets, uncovering the institutions with the highest costs and the biggest liabilities. Some of the time, such expenses can be a necessary evil. With a surge in online-only challenger banks looking to seize market share by appealing to millennials, it is inevitable that established brands will seek to invest aggressively in improving their infrastructure.

As things stand, there is an argument that investors are spoiled for choice when it comes to the best US bank stocks right now. After a torrid year that was exacerbated by the coronavirus pandemic, the four biggest consumer-facing brands all put in a resilient performance in the second quarter of 2021.

The Big Four

Wells Fargo delivered a net income of $6.04bn in the three months to 30 June, a stark contrast to the net loss of $3.8bn seen over the same period in 2020. The bank attributed the bounceback to the “continued economic recovery” seen in the US, but it did warn that “low interest rates and tepid loan demand” remain a worry.

Bank of America announced similar concerns when it unveiled its latest earnings report. Net income of $9.2bn was boosted by the release of $1.6bn in funds previously held in reserve in case borrowers defaulted on their loans. However, revenues generated from interest fell by 6%, hit in part by the persistently low base rate set by the US Federal Reserve. 

Other contenders for the best US bank stock to buy could include Citigroup, which also experienced a $1.1bn benefit after freeing some of the cash set aside for write-offs. The bank's CEO, Jane Fraser, declaring that consumer and corporate confidence is rising, said: “We saw this across our businesses, as reflected in our performance in investment banking and equities as well as markedly increased spending on our credit cards. While we have to be mindful of the unevenness in the recovery globally, we are optimistic about the momentum ahead.”

Last but by no means least in our roundup of top US bank stocks, JPMorgan Chase secured a quarterly net income that was just shy of $12bn. Again, credit reserve releases of $3bn played a big role here. The bank’s chairman and CEO, Jamie Dimon, said combined credit card spending was up 45% in this quarter, and was 22% higher than the pre-pandemic levels seen in the second quarter of 2019. Unsurprisingly, travel and entertainment appeared to be the big drivers here.

Issues in the US banking sector infographic

When results from all four of these top US bank stocks are brought together, the big picture shows that they collectively booked $33bn in profits, $9bn of which can be linked to the release of reserves. That is $9bn higher than what analysts had been expecting.

Although levels of inflation are rising in the US, the mood music in Washington suggests that banks will have to contend with near-zero interest rates for some time yet. The Federal Reserve chairman, Jerome Powell, told a congressional committee that the central bank has no plans to increase the base rate until 2023 at the earliest. This could be an unwelcome drag on profitability in the US banking sector, even if demand for loans rises.

Best US bank stocks for 2021

Even as net incomes recuperate, data from the Financial Times shows that costs are also rising substantially as the biggest US bank stocks attempt to see off a threat from smaller (and arguably more agile) fintech rivals. Total expenditure by the big four came in at $6.6bnover this most recent quarter, a year-on-year increase of 10%.

Technology and marketing are principally behind this surge. Given how the coronavirus pandemic accelerated the decline in cash use, some banks are now in a race to catch up when it comes to digitisation. In the US, online-only outfits including Current, Varo and Chime have sought to woo customers by processing their payments faster, offering sleek smartphone apps and doing away with transaction fees and minimum balances.

In particular, it seems the round of stimulus cheques that were sent to American households will have taught the traditional banking sector a lesson: consumers expect speed and will vote with their feet if they do not get their funds quickly enough. Indeed, research from Cornerstone Advisors suggests that 15% of US millennials had their primary accounts at digital banks in December 2020, up from just 5% at the start of that year. 

This is where the battle is heading now, and the main US bank stocks are gearing up for a fight. Between them, JPMorgan, Wells Fargo and Citigroup closed more than 250 branches in the first half of 2021, and more closures are expected. This stems from confidence that those customers who began to embrace online banking during lockdown will not be reverting to branches any time soon. It could also free up capital to enhance digital offerings, which are quickly becoming the main destination for people opening accounts and applying for loans.

FAQs

The best American bank stocks can sometimes serve as a barometer for how the economy is performing, and can suffer falls when Wall Street gets nervous that a recovery is in peril. Despite posting resilient results in Q2, the likes of Citigroup suffered a dip in their shares because of the lingering concerns over interest rates. 

According to CNN Business, the current consensus among investment analysts is that Wells Fargo, Bank of America, JPMorgan Chase and Citigroup are all a buy. In terms of projected share price growth, the median forecast for Citigroup is the most generous as it is expected to rise by 26.3% over the next 12 months.

Thomas Michaud, the CEO and president of the investment bank Keefe, Bruyette & Woods (KBW ) recently told CNBC that he believes “bank stocks are a good place to be if inflation concerns continue to grow”.

Currency.com offers shares for many of the best US bank stocks in 2021, including all four of the companies highlighted in this article,in tokenised form. This allows you to gain exposure to the share price without owning the underlying stock, and gives you the opportunity to enter into short positions if you believe prices will fall. It is important, however, never to invest more than you can afford to lose. 

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