Interest rates are rising around the world as central banks are trying to cool off the post-pandemic economy with historically high inflation levels. Recently, US Fed Chairman Jerome Powell indicated that an interest rate hike of 50 basis points would be on the table for the May meeting. A higher interest rate environment is a tailwind for the financial industry as it increases the interest income.
Furthermore, the global financial services market is projected to reach $28.53 trillion by 2025, growing at a CAGR of 6%., Research And Markets report. Consequently, the banking industry should benefit from this growth.
With this in mind, I am going to analyze and compare two bank stocks, Bank of America Corporation (BAC) and JPMorgan Chase & Co. (JPM), to determine which is a better investment for 2022.
BAC is a diversified bank that provides multiple banking and financial products and services for consumers, institutional investors, companies, and governments worldwide. JPM operates as a financial service company worldwide through its key four segments: Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, and Asset & Wealth Management.
Year-To-Date (YTD), shares of BAC are down 18.5%, and JPM has lost 23.3% over the same period.
Recent Developments
On April 27th, Bank of America announced that its board of directors had declared an unchanged quarterly dividend of $0.21 a share, payable on June 24th. It translates into a forward yield of 2.32%, which is below the sector’s median threshold of 3.00%.
Financial Overview & Analysts' Estimates
In the first quarter of 2022, Bank of America's total revenue rose 1.7% year-over-year to $23.2 billion, beating analysts' estimates by $110 million. Also, BAC reported GAAP EPS of $0.80, topping expectations by $0.05.
BAC's first-quarter net interest income stood 13% higher year-over-year at $11.6 billion, driven by strong deposit growth and investment of excess liquidity, loan growth, and benefits from higher long-end interest rates. However, its noninterest income was down 8% YoY to $11.7 billion, caused by lower investment banking revenue. Also, the bank’s average deposits increased by $240 billion, or 13%, to $2.0 trillion.
For the second quarter of 2022, analysts expect BAC’s EPS to be $0.82, showing a 20.18% year-over-year decrease. However, an $23.40 billion average revenue estimate for the current quarter shows a 9.01% YoY growth.
On April 13th, JPMorgan Chase revealed an earnings report for the first quarter of 2022. In Q1, JPMorgan's revenue decreased 5.0% year-over-year to $30.7 billion, surpassing Wall Street revenue estimates by $170 million. The bank’s Non-GAAP EPS has been reported at $2.63, however, missing analysts' consensus by $0.07.
JPMorgan's first-quarter net income came in 42% lower year-over-year at $8.3 billion, mainly driven by a net credit reserve build of $902 million compared to a net credit reserve release of $5.2 billion in the year-ago period. Besides, the stock has a forward annual payout of $4.00, which translates to a dividend yield of 3.25%.
Currently, Wall Street forecasts JPM's earnings to decrease 25.60% in the second quarter of 2022 to $2.81 per share. Besides, analysts project its Q2 top line to rise 1.69% year-over-year to $30.99 billion.
Comparing Valuations
When it comes to Forward Non-GAAP P/E, BAC is currently trading at 11.00x, which is in line with JPM, whose multiple is also at 11.00x. However, both banks trade with a slight premium compared to the sector's median of 10.49x.
In terms of the PEG multiple TTM, JPM's PEG multiple of 1.31x is about 555% higher than BAC's 0.20x. What is more, Bank of America's multiple looks undervalued compared to the sector’s median of 0.23x.
Conclusion
While both BAC and JPM are expected to benefit from an increasing interest rates environment, I believe BAC is more attractive for long-term investors because of its strong financials, cheaper valuation, and higher forward growth rates.
BAC shares were trading at $36.38 per share on Thursday morning, up $0.13 (+0.36%). Year-to-date, BAC has declined -17.83%, versus a -11.27% rise in the benchmark S&P 500 index during the same period.
About the Author: Oleksandr Pylypenko
Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist.
Better Buy for 2022: Bank of America vs. JPMorgan StockNews.com
