With inflation coming below Wall Street estimates in October and nonfarm payrolls rising less than expected last month, there is growing belief in the market that the Fed will start cutting rates next year. This will likely ease banks’ concerns over deposit costs, loan growth, and credit quality.

However, the recent Fed minutes indicate that the central bank will likely keep the policy “restrictive” due to concerns that inflation could be stubborn or move higher. Amid this uncertainty, waiting for better entry points in M&T Bank Corporation (MTB) and Bank of America Corporation (BAC) could be prudent.

Before diving deeper into the fundamentals of these stocks, let’s take a closer look at what’s taking place in the U.S. banking sector.

It has been a challenging year for the U.S. banking sector as it has witnessed the failure of three regional banks, slowing loan growth, a rise in unrealized bond losses, credit rating downgrades, the risk of default arising out of commercial real estate (CRE) loans, heightened capital requirements, and the overall deterioration of the macroeconomic environment.

Delinquent commercial real estate loans at U.S. banks have hit their highest level in a decade due to the rise of remote working, high-interest rates, and an uncertain economy. The volume of past-due loans on properties rented to others having missed more than one payment has risen 30% to $17.70 billion in the three months ended September. Moreover, credit card debt rose to a record high during the third quarter.

However, inflation coming below Wall Street estimates and the lower-than-expected rise in nonfarm payrolls in October has boosted the belief that the Fed could stop raising interest rates. According to the CME FedWatch Tool, 94.8% of traders are betting on the Fed keeping rates steady at its December policy meeting.

After raising rates eleven times in a row since March 2022 — four of them were this year —the Fed decided to leave interest rates unchanged for the second time in a row. Since July, the Federal Reserve has kept the benchmark interest rates steady between 5.25% to 5.5%.

Central bank officials maintain that their policy decisions may be influenced by the incoming macroeconomic data, even in the face of indications that the Fed is accomplishing a soft landing.

The recent Fed minutes indicate that policy will need to remain restrictive amid concerns of inflation rising or staying stubborn. The minutes stated, “In discussing the policy outlook, participants continued to judge that it was critical that the stance of monetary policy be kept sufficiently restrictive to return inflation to the Committee’s 2 percent objective over time.”

The Fed has maintained its cautious approach and expressed little interest in cutting rates anytime soon, meaning rates could remain high for longer. Although high-interest rates would bolster banks' net interest income, it will likely negatively affect loan growth as borrowing becomes expensive. Moreover, the deposit costs are also expected to rise.

Furthermore, the operating environment for the U.S. banking sector may be made worse by additional rating downgrades brought on by worries about the high-interest rate environment. This might result in even higher borrowing costs and stricter lending standards.

Considering these factors, let’s take a look at the fundamentals of the two Money Center Banks stocks, starting with number 2 from the investment point of view.

Stock #2: M&T Bank Corporation (MTB)

MTB is a bank holding company. The company’s bank subsidiaries include Manufacturers and Traders Trust Company and Wilmington Trust, N.A. It offers retail and commercial banking and others. Its segments include Business Banking, Commercial Banking, Commercial Real Estate, Discretionary Portfolio, Residential Mortgage Banking, and Retail Banking.

In terms of trailing-12-month non-GAAP P/E, MTB’s 7.99x is 14.3% lower than the 9.33x industry average. Its 0.89x forward non-GAAP PEG is 30.1% lower than the 1.27x industry average. Additionally, its 2.20x forward Price/Sales is 5.9% lower than the 2.34x industry average.

MTB’s net interest income for the third quarter ended September 30, 2023, increased 5.7% year-over-year to $1.78 billion. Its net income available to common shareholders rose 6.9% over the prior-year quarter to $664 million. Its EPS came in at $3.98, representing an increase of 12.7% year-over-year. Also, its CET1 ratio came in at 10.94%, compared to 10.75% in the year-ago quarter.

On the other hand, its noninterest income declined 0.5% year-over-year to $560 million. Its provision for credit losses increased 30.4% year-over-year to $150 million.

Analysts expect MTB’s EPS for the quarter ending December 31, 2023, to decline 18.2% year-over-year to $3.69. Its revenue for fiscal 2023 is expected to increase 17.2% year-over-year to $9.58 billion. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past month, the stock has gained 10.3% but declined 26.5% over the past year to close the last trading session at $125.45.

MTB’s POWR Ratings reflect this bleak outlook. It has an overall rating of C, equating to a Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

It has a C grade for Value, Momentum, Stability, and Quality. It is ranked #5 out of 10 stocks in the Money Center Banks industry. Click here to see the other ratings of MTB for Growth and Sentiment.

Stock #1: Bank of America Corporation (BAC)

BAC provides banking and financial products and services for individual consumers, small and middle-market businesses, institutional investors, large corporations, and governments worldwide.

In terms of trailing-12-month non-GAAP P/E, BAC’s 8.73x is 6.4% lower than the 9.33x industry average. Its 0.91x forward Price/Book is 14.7% lower than the 1.06x industry average.

On the other hand, its 1.56x forward non-GAAP PEG is 22.7% higher than the 1.27x industry average. Its 2.35x forward Price/Sales is also 0.6% higher than the 2.34x industry average.

For the third quarter ended September 30, 2023, BAC’s total revenue, net of interest expense, increased 2.7% year-over-year to $25.17 billion. Its net income applicable to common stockholders rose 10.5% year-over-year to $7.27 billion.

Additionally, its EPS came in at $0.90, representing an increase of 11.1% year-over-year. Also, its net interest income rose 4.5% over the prior-year quarter to $14.38 billion. In addition, its CET1 ratio came in at 11.9%, compared to 11% in the year-ago quarter.

Street expects BAC’s revenue for fiscal 2023 to increase 6.4% year-over-year to $101.04 billion. On the other hand, its EPS for the quarter ending December 31, 2023, is expected to decline 12.6% year-over-year to $0.74. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past month, the stock has gained 12.7% and declined 20.3% over the past year to close the last trading session at $29.66.

BAC’s uncertain outlook is reflected in its POWR Ratings. It has an overall rating of C, which translates to Neutral in our proprietary rating system.

It is ranked #3 in the same industry. It has a C grade for Value, Stability, Sentiment, and Quality. To see BAC’s ratings for Growth and Momentum, click here.

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BAC shares rose $0.09 (+0.30%) in premarket trading Wednesday. Year-to-date, BAC has declined -7.90%, versus a 20.23% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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