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Last year was the year of banking layoffs. According to FT research, global banks downsized their personnel by nearly 62,000, exacerbated by the UBS takeover of Credit Suisse and the US regional banking crisis. Like in the Big Tech sector, much of the layoffs represent an overexpansion correction since 2020.

“The revenues aren’t there, so this is partly a response to overexpansion. But there is also a simpler explanation: political cost-cutting,”

Lee Thacker of Silvermine Partners to FT

On Friday, big US banks delivered their financial earnings from JPMorgan Chase (NYSE: JPM) and Bank of America (NYSE: BAC) to Citigroup (NYSE: C). They all reported missed expectations or losses. However, with interest rates on the chopping block in 2024, a major negative driver could be in the rearview mirror.

Banking Feedback Loop

Banks ‘ balance sheets suffered when long-term bonds dived due to the rate hiking cycle. Their fixed-rate interest payments became less attractive compared to short-dated bonds. Banks must hold a certain capital level, which causes more expensive borrowing in return.

Fed fund futures priced in the beginning of the end of this negative feedback loop in March at 83.21% probability.If a recession is in the cards, presently at a 62.9% chance, the Federal Reserve is likely to keep lowering interest rates throughout the year to stabilize the banking system.

Moreover, if recession-induced loan defaults occur in greater numbers, banks can acquire discounted assets, boosting their balance sheets in the long run. That said, only certain banks are likely to be in that position.

With leaner operating costs and rate cuts on the horizon, which bank stocks to hold in 2024?

Wells Fargo & Co, (Nasdaq: WFC)

One of the Big Four, Wells Fargo, beat Q4 earnings expectations on Friday. Against the Zacks Investment Research survey of average $1.16 earnings per share, the bank delivered $1.29, adjusted for costs and one-time gains.

Likewise, Wells Fargo generated $20.48 billion in revenue vs $20.30 billion forecasted. This is a 2% improvement from the year-ago quarter of 2022. The higher interest rate environment only partially offset the net interest income, falling by 5% to $12.78 billion. Overall, Wells Fargo netted $3.48 billion in income, which is 3.45% up from a year-ago quarter.

During 2023, WFC shares rose 19% amid the banking turmoil. The bank took a $1.9 billion earnings hit from the FDIC-related special assessment fees. The bank’s 2024 net interest income could go even lower than in 2023, between 7% to 9%. 

“As we look forward, our business performance remains sensitive to interest rates and the health of the U.S. economy, but we are confident that the actions we are taking will drive stronger returns over the cycle,”

Wells Fargo CEO Charles W. Scharf

Given the bank’s status, investors will likely consider this a buying on the weakness opportunity. Year-to-date, WFC is down 2.41%. Considering this, 21 analyst inputs pulled by Nasdaq place WFC stock as a “strong buy.”

The average WFC price target is $54 vs current $48. The high estimate is $66, while the low forecast is $46 per share.

JPMorgan Chase (Nasdaq: JPM)

In a fragile fractional reserve banking system, consolidation is inevitable. JPM is the largest beneficiary of that consolidation. On Friday, the bank missed FactSet’s estimated $3.35 earnings per share at $3.04 reported. 

Equally, JPMorgan’s net income decreased 15% from a year-ago quarter to $9.3 billion. However, the bank’s unique status in the US banking system paints a noisy picture. The decline in profits came from the $23 billion FDIC-related cost during the Silicon Valley Bank fallout. 

Moreover, just like Wells Fargo, the bank suffered a $2.9 billion hit from the FDIC special assessment fee. In contrast to these losses, JPMorgan delivered its most profitable year to date, with a 23% revenue uptick for 2023 at $158 billion. The bank’s profits also broke records with $49.6 billion for the full year, representing an impressive 32% growth. 

During 2023, JPM stock gained 31% in value. Since the beginning of 2024, JPM shares are down 0.13%, presenting an equal opportunity scenario as Wells Fargo. Based on 24 analyst inputs pulled by Nasdaq, JPM stock is a “strong buy.”

The average JPM price target is $184.11 vs the current $171. The high estimate is $234 (12 months ahead), while the low forecast is $140 per share. 

UBS Group AG (NYSE: UBS)

UBS is another bank that the Financial Stability Board (FSB) considers a globally systemically important bank (G-SIB). Following the acquisition of faltering Credit Suisse, UBS stock gained 65% in value by the end of 2023.

UBS Q423 earnings report is scheduled for January 30th. In the last Q3 report, the bank missed analysts’ consensus with a negative $0.24 earnings per share vs expected $0.06. Following the CS absorption and integration, UBS spent 99.6 cents of every dollar of revenue on operating expenses, delivering the group’s 99.6% cost/income ratio.

However, after credit loss expenses related to the integration of $306 million, UBS delivered $844 million as underlying PBT (profit before tax). In addition to these strong inflows, UBS gained $22 billion new money stream in Global Wealth Management (GWM) and $33 billion new net deposits from GWM and Personal and Corporate Banking (P&C).

Furthermore, investors know that UBS failure is not an option. After all, the Swiss National Bank (SNB) intervened with a $185 billion emergency injection before the UBS takeover. The integration of CS assets will continue to exert operational costs, presenting another buying on the weakness opportunity for investors.

Based on 11 analyst inputs pulled by Nasdaq, UBS stock is a “buy.” The average UBS price target is $32.56 vs. the current price of $29. The high estimate is $40.5, while the low forecast is $20.5 per share. 

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