JPMorgan vs. Goldman Sachs: Which Banking Stock Is a Buy Right Now?

Author: Finscreener

Estimated read time: 4 minutes

Publication date: 11th Oct 2022 21:37 GMT+1


The market turbulence in 2022 has driven the valuations of stocks across multiple sectors lower in 2022. For example, the banking sector is down almost 26% year-to-date, while shares of banking giants JPMorgan (NYSE: JPM) and Goldman Sachs (NYSE: GS) are trading 38% and 29%, respectively, below all-time highs.

The current environment of rising interest rates and red-hot inflation is expected to act as a headwind for banking companies. While interest rate hikes will help banks improve the bottom line, they will also reduce demand for loans due to higher debt costs. Additionally, the prospect of a global recession may lead to an increase in delinquency rates weakening the balance sheet of banks.

But JPMorgan and Goldman Sachs are among the largest banks globally. Despite the recent pullback, JPM stock is up 238%, while GS stock has gained 200% in the last decade after adjusting for dividends. In this period, the S&P 500 index has returned 204% to investors.

Let’s see which between the two banking giants should be part of your portfolio right now.

 

Is JPM a good stock to buy?

The Federal Reserve has raised interest rates multiple times in 2022, which should benefit JPMorgan as it has several interest-earning assets that can be repriced much faster than interest-earning liabilities. In Q2 of 2022, JPMorgan increased net interest income (NII) by $1.3 billion year over year. In the first six months, it earned an NII of almost $30 billion and expects to end the year with an NII of $58 billion.

Yes, a recession will slow down JPMorgan’s growth plans. But, the company raised its allowance for credit losses in 2020 to $34 billion due to the COVID-19 pandemic, accounting for 3.27% of its loan book. It still managed to end the year with a net profit of $29 billion, showcasing the resiliency of the company’s financials.

Bearish market sentiment and associated volatility have driven JPMorgan’s investment banking fees lower by 54% in Q2. The number of companies going public in 2022 has fallen off a cliff. But as investor sentiment improves, JPM should see a massive uptick in this high-margin business segment.

JPM has to maintain a common equity tier 1 (CET1) capital ratio of 11.2%. The ratio calculates the bank’s core capital expressed as a percentage of risk-weighted assets. The CET1 ratio at the end of Q2 was 12.2% which is forecast to increase to 12.5% in 2023.

The pullback in JPM stock has increased its dividend yield to a tasty 3.8%. In the last 20 years, these payouts have increased by 5.5% annually.

JPM stock is cheap and priced at 9.2x forward earnings. Its bottom line might also double between 2022 and 2026.

 

Is GS stock a good buy?

Goldman Sachs is another cheap bank stock that is priced at less than eight times forward earnings. Its PEG (P/E-to-growth) is also low at 0.59x, indicating GS stock is significantly undervalued. Generally, a PEG multiple of below 1x suggests a stock is undervalued and vice-versa.

Similar to JPMorgan, even Goldman Sachs is wrestling with tepid sales in divisions such as investment banking and asset management. However, this weakness might be offset by verticals such as consumer and wealth management as well as global markets. A diversified revenue stream should allow Goldman Sachs to handle market downturns easily. In Q2, its revenue increased by 23% while net earnings narrowed by 48% year-over-year.

Goldman Sachs also provides investors a tasty dividend yield of 3.3% and is trading at a discount of 25% to the consensus price target.

 

The final takeaway

Goldman Sachs and JPMorgan are two stocks trading at a discount to Wall Street estimates. Both these banking giants can be a part of your equity portfolio given their leadership position, attractive valuation, and juicy dividend yield.


Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.