Shares of JPMorgan Chase (NYSE: JPM), Bank of America (NYSE: BAC), and Wells Fargo (NYSE: WFC) have all been beaten down in the wake of the collapse of SVB Financial's (NASDAQ: SIVB) Silicon Valley Bank. But maybe they shouldn't be trading lower at all.
These are highly profitable institutions, with a total of more than $78 billion in net income between them over the past four quarters, and they are all benefiting from rising interest rates: Their net interest income rose by between 22% and 28% in 2022. Plus, all three are excellent income stocks with dividend yields in the 3% range that are well-covered by their profits.
Now, these fantastic mega-banks are all trading at discounted valuations despite the fact that they face little risk of running into trouble from the issues that struck a few of their smaller peers. In fact, they could end up being net beneficiaries of the current turmoil.
Deposit bases could rise
There are a couple of reasons these three mega-banks could see higher deposits due to the current situation in the regional banking space.
For one thing, these banks fall into the category of systemically important financial institutions (SIFIs) -- institutions with more than $250 billion in assets. As such, they are subject to higher capital requirements and significantly more regulatory scrutiny than smaller banks. And they have been deemed "too big to fail." Given that, numerous regional bank clients (especially businesses) may conclude their deposits are safer in these larger institutions. To be sure, by its actions to protect depositors at Silicon Valley Bank, the government implicitly guaranteed the deposits at any other regional banks that should fail, but unless the formal FDIC limit is raised significantly, we could see a shift in deposits toward the bigger banks.
It's also worth noting that Silicon Valley Bank had more than $175 billion in total deposits as of the end of 2022. Now, many of Silicon Valley Bank's customers will be looking for new banking homes. More than $40 billion was withdrawn from it on the day before it was shut down, and all of that money needed to go somewhere.
This could presage the reversal of a recent trend. Take a look at Bank of America's deposit base over the past year -- after peaking in the first quarter of 2022, it has steadily declined. Presumably, people and businesses were moving funds to institutions that offered higher rates to depositors as benchmark interest rates rose.
However, we've already seen reports indicating that JPMorgan Chase, Bank of America, and Wells Fargo are all seeing above-average inflows in the wake of the Silicon Valley Bank failure. If this continues, it could provide a tailwind of low-cost capital for these institutions.
The entire financial sector has been under pressure over the past week or so, and these bank stocks were no exception. As of the close of trading Tuesday, JPMorgan Chase was the top performer among them, with shares only down by 6% so far in March, while Wells Fargo and Bank of America were down 14% and 16%, respectively.
In fact, both Wells Fargo and Bank of America trade for more than 5% less than their book value. JPMorgan Chase isn't quite so inexpensive, but it is the most profitable of the three in terms of return on equity, and its book value is 17% lower than it was at the start of 2022 despite the benefits of higher interest rates.
The bottom line
Not only do these three banks have excellent profitability and the potential to be beneficiaries of the current uncertainty in the banking industry, but they are trading at significant discounts to their valuations of just a few weeks ago. To be sure, the volatility in bank stocks could persist for some time, and a recession could cause default rates to rise, but for long-term investors willing to deal with short-term volatility, these three bank stocks look like excellent opportunities.
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SVB Financial provides credit and banking services to The Motley Fool. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Matthew Frankel, CFP® has positions in Bank of America and Wells Fargo. The Motley Fool has positions in and recommends Bank of America, JPMorgan Chase, and SVB Financial. The Motley Fool has a disclosure policy.
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