Bank Of America, Fifth Third Bancorp To Gain From 'Higher For Longer' Interest Rates: JPMorgan's Top Picks

JPMorgan analyst Vivek Juneja’s recent insights suggest a positive outlook for banks like Bank of America Corp BAC and Fifth Third Bancorp FITB, driven by expectations of a recovering economy and sustained high interest rates.

Rates Are Staying Higher For Longer

Banks continue to position themselves for growth despite inflation concerns.

Juneja notes that “rates are staying higher for longer with sticky inflation,” with 10-year Treasury yields up significantly in the second quarter. This trend, coupled with a rebound in consumer spending — particularly in discretionary categories — bodes well for banks’ net interest income.

While commercial loan growth remains sluggish, banks are managing deposit costs effectively. This is helping offset the impact of soft loan demand.

Bank Of America To Benefit From Markets-Related Revenues

In terms of stock performance, larger banks like BoA “should benefit more from markets-related revenues and higher long term rates,” Juneja noted.

Wells Fargo & Co WFC, despite having a smaller share of markets-related revenues, is also poised for growth, especially with expectations of an asset cap lift soon. Both banks also actively buy back shares, which should boost performance.

Juneja is Overweight BoA stock with an year-end price target of $40.50.

Also Read: Market Reaction To Bank Earnings Is Mixed, JPMorgan Analysts Project Further Decline In Net Interest Income

Fifth Third Bancorp Should See Significant Earnings Upside

Among regional banks, Fifth Third Bancorp stands out. Juneja has upgraded the stock to overweight relative to its peers, citing its potential to benefit from higher long-term rates.

He expects Fifth Third to experience significant earnings growth, driven by higher reinvestment yields and strong performance metrics. “Fifth Third should benefit relatively more from higher reinvestment yields due to little larger share of securities maturing/repricing in 2024 (16%),” Juneja said.

He also find the stock “well positioned longer term from a credit quality perspective… given its low share of non-prime consumer loans and low office CRE exposure.”

Despite its relatively higher valuation multiple, Fifth Third’s solid performance, including a high core return on tangible common equity (RoTCE) in the first quarter, justifies its position as a top pick.

Juneja is Overweight Fifth Third Bancorp with a price target of $39.50.

Challenges Remain

Challenges include the drag from derivatives and ongoing credit quality concerns. But Juneja’s analysis paints a largely positive picture for the banking sector.

Investors looking for opportunities in the banking space may find BoA and Fifth Third Bancorp particularly appealing, given their potential for growth in a higher-rate environment. As the economy continues to recover, these banks could position themselves well to deliver strong returns for investors.

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