What are the 3 Best Bank Stocks This Earnings Season?

Key Points

• As is Wall Street’s tradition, banks will lead off the second quarter earnings season.  
• JPMorgan Chase (JPM): The bank is set to post another record quarter in terms of revenue which makes one of the best in the sector look even more attractive. 
• Bank of America (BAC): Even after announcing a dividend increase, BAC stock still looks undervalued. 
• PNC Bank (PNC): An undervalued regional bank with a strong balance sheet and a compelling dividend.  

Earnings season kicks off this week. In a tried-and-true Wall Street ritual, bank stocks will be among the first to report. That means it’s time to look at which banks are likely to look like good buys this earnings season.  

Overall, this may be a good time to consider bank stocks. In late June, 23 of the largest banks passed the Federal Reserve’s stress tests. Markets breathed a sigh of relief as these tests offer a glimpse into a bank’s ability to weather a severe recession and the emerging commercial real estate crisis.  

That being said, most economists still predict a recession. And while they may continue to move the goalposts for when that will occur, few believe that the economy will be able to avoid a recession at some point in the next 12 months.  

That means that investors will be paying close attention to what the banks have to say. Among the issues investors will be watching is the pace of net deposit outflows. While the trend is favorable, short-term interest rates are still working against the banks. Investors will also look for any sign of loan rationing, particularly among the smaller regional banks.  

Expect More of the Same from the Best in Class 

One way to invest in any sector is to buy the best in class. In the case of the banking sector, that means investing in JPMorgan Chase & Co. NYSE: JPM. The largest bank in the United States delivered record quarterly revenue of $38.35 billion when it reported its first quarter results. Analysts are predicting more of the same as the bank gets ready to report on July 14.  

In that quarterly report, JPMorgan also posted a 55% year-over-year increase in earnings. What’s particularly encouraging about the earnings beat is that analysts have been predicting the bank to post lower year-over-year earnings in 2023. But with one quarter already in the books, earnings are on pace to exceed prior estimates.  

That may be one reason that two analysts have upgraded JPM stock in July. And both upgrades come with price targets above the consensus estimate of $158.94.  

For all that, JPM stock still looks attractively valued at just 10x forward earnings. Plus, upon passing the stress test, the bank saw fit to increase its quarterly dividend from $1.00 to $1.05 per share.  

This Bank Looks Like a Good Value 

Bank of America NYSE: BAC also announced a dividend increase after passing its recent stress test. That takes its yield up to its highest level in 10 years, but the stock still looks undervalued compared to other banking stocks.  

Among the big banks, Bank of America stood out as one of the most improved when it came to the results of the stress test. In fact, the bank showed that it was investing cash that came from excess deposits above its safe capital buffer.  

The company posted strong first quarter results with earnings per share (EPS) of 94 cents on revenue of $26.26 billion. The forecast for this quarter is for EPS of 84 cents on revenue of $24.98 billion. Both numbers would be significantly higher on a year-over-year basis and would set the stage for BAC stock to move higher.  

A Regional Bank with Significant Upside 

Sticking with the big banks is a solid investment strategy, but if you want to venture into the regional banks, The PNC Financial Services Group NYSE: PNC looks like a strong choice. The bank’s total loans and deposits have been steadily increasing. And in a familiar story, the bank recently increased its dividend which already has a healthy yield of 4.72%.  

A key area of concern is the bank’s exposure to commercial loans which was around 69% at the end of March 2023. With many analysts predicting that the day of reckoning is coming for commercial loans, that could be a headwind.  

However, an item that didn’t get as much attention as the result of the stress tests was the commercial real estate (CRE) relief guidance that was released. This will give banks like PNC the ability to become more creative in mitigating office real estate loans.