How to Analyze a Bank Stock When the Fed Hikes (and Why Our Verdict Says SELL on JPM, BAC and WFC)
Open JPMorgan, Bank of America or Wells Fargo on Investor Sam and you will see something that looks wrong: three of the most profitable financial institutions on earth, rated SELL, SELL and STRONG SELL, each with a financial-health score of zero. The flag in every case reads “high debt-to-equity” — 11.2×, 10.3×, 10.9×. We want to be straightforward about this. Those ratings are what happens when a framework built for industrial companies is pointed at a bank, and they are a useful lesson in why banks have to be read differently. With the Fed having just raised rates for the first time since 2023, this is the right week to learn how.
Why the standard ratios break on a bank
For a manufacturer, debt is money borrowed to build things, and ten dollars of debt for every dollar of equity would be reckless. For a bank, “debt” is mostly deposits — the $2 trillion that Bank of America’s customers keep in their checking and savings accounts — and taking deposits and lending them out is the entire business. A bank with 10× leverage is not over-borrowed; it is a bank. The same goes for the other ratios our health pillar leans on: a current ratio is meaningless when the assets are loans and the liabilities are deposits, and interest coverage is meaningless when interest is both the main cost and the main revenue.
So the health pillar scores zero, the composite drops into SELL territory, and the quality and value pillars — which are meaningful for banks — get drowned out. JPMorgan’s quality pillar actually scores 60 on a 15.7% return on equity and a 31% net margin; its value pillar scores 29. Those two numbers are the start of a real analysis. The rest of this article is the framework that replaces the broken ratios.
Check 1 — Net interest income: the engine, and what a hike does to it
A bank’s core profit is the spread between what it earns on loans and securities and what it pays on deposits and borrowings. That spread in dollars is net interest income (NII); as a percentage of earning assets it is the net interest margin (NIM). In the second quarter of 2026, JPMorgan’s NII was $25.5 billion, up 10% from a year earlier; Bank of America’s was $16.2 billion, up 9%, at a net interest yield of 2.08%, 14 basis points higher than a year ago.
What happens to those numbers when the Fed hikes is the question every bank investor should be able to answer for each bank they own, and the banks tell you. Bank of America disclosed in its second-quarter materials that a 100-basis-point parallel rise in rates above the forward curve would add about $1.0 billion to NII over the following twelve months, while a 100-basis-point fall would subtract about $2.2 billion. That asymmetry is the whole story of the current moment: the September hike helps, modestly; the cuts the market had been expecting would have hurt, more.
Find this disclosure in the “Interest Rate Risk Management” section of each bank’s 10-Q. It is usually a small table showing the NII effect of +100 and −100 basis points. A bank that gains from rising rates is asset-sensitive; one that loses is liability-sensitive. The large money-centre banks are mostly asset-sensitive at the moment; many regional banks and anyone with a large book of long fixed-rate mortgages are not.
Check 2 — Deposit beta: how fast the cost side catches up
The catch in Check 1 is that the benefit of a hike is front-loaded. Loans reprice quickly; deposits reprice as customers notice they could earn more elsewhere. The share of a rate increase that a bank ends up passing on to depositors is called the deposit beta, and it rises over time. In the 2022–2023 hiking cycle, betas at the big banks started near zero and climbed toward 50% as money-market funds paid 5% and customers moved. With Treasury bills again above 4% and the 10-year above 5%, that migration is the thing to watch through the winter.
Two numbers to track quarter by quarter, both in the earnings release: total average deposits (Bank of America has grown them for twelve straight quarters, to $2.02 trillion) and the average rate paid on interest-bearing deposits. If deposits keep growing while the rate paid rises only slowly, the bank has pricing power with its customers — the banking equivalent of a moat. If deposits shrink or the rate paid jumps, the NII gain from the hike will be short-lived.
Check 3 — Capital: CET1 is the number regulators care about, and so should you
Replace debt-to-equity with the Common Equity Tier 1 ratio (CET1): the bank’s highest-quality capital as a percentage of its risk-weighted assets. It is disclosed on the first page of every earnings release. JPMorgan reported 14.1% at the end of the second quarter; Bank of America reported 11.2%. Both are well above their regulatory minimums, and the gap between the actual ratio and the minimum is the cushion that absorbs loan losses before shareholders are diluted. A bank running close to its minimum cannot buy back stock or raise its dividend; one with a wide cushion can, which is why capital return at the big banks has been strong.
A second capital-related check that 2023 made unforgettable: unrealised losses on securities. Banks hold large bond portfolios, and when yields rise those bonds fall in market value. For bonds classified as “held to maturity” the loss does not hit reported capital, but it is real, and it is disclosed in the securities footnote. With the 10-year at 5% for the first time since 2023, those paper losses have widened again. They are only a problem if a bank is forced to sell — which is only a problem if deposits leave — which brings you back to Check 2. The three checks are one system.
Check 4 — Credit: the cost that arrives last
Higher rates help a bank’s revenue in year one and hurt its borrowers in year two. The line to watch is the provision for credit losses on the income statement and the net charge-off rate in the credit-quality tables. Card balances and commercial real estate are the two books most exposed to a 4% policy rate and a 7% mortgage rate. So far the big banks have reported provisions in line with or below expectations, but that is a lagging indicator by construction — provisions rise after delinquencies rise, which happens after borrowers have been paying higher rates for a while. A bank whose NII is growing 10% while its provisions are flat is in the best part of the cycle. The question is how long the best part lasts.
Check 5 — Valuation: price-to-book against return on equity
The one place where our ratios page does give you the right bank numbers is valuation. For a bank, the multiple that matters is price-to-book, and the number that justifies it is return on equity. A bank earning a 10% return on its equity is worth roughly its book value; one earning 15–17% deserves a premium; one earning 6% deserves a discount. From the FY2025 ratios pages:
| Bank | Return on equity | Price-to-book | Trailing P/E | Reading |
|---|---|---|---|---|
| JPMorgan (JPM) | 15.7% | 2.5× | 16× | Best-in-class returns, priced accordingly; the premium is the bet |
| Wells Fargo (WFC) | 11.8% | 1.7× | 15× | Mid-pack returns at a mid-pack multiple |
| Bank of America (BAC) | 10.1% | 1.4× | 14× | Lowest returns and lowest multiple of the three; the most rate-sensitive upside |
(Multiples are at each bank’s December 31, 2025 share price; all three have risen since.) The table makes the investment question concrete. JPMorgan at 2.5× book is priced as though its 16% return on equity is permanent; if you believe that, the price is fair, and if you think returns mean-revert toward 12%, it is expensive. Bank of America at 1.4× book is priced for a 10% return; its own sensitivity disclosure says a hiking cycle lifts that, which is the case for owning it now. Wells Fargo sits between. The compare tool lets you put all three on one screen; return on equity and price-to-book are the two rows to read.
Putting the hike through the framework
Run the September 16 decision through the five checks and a coherent picture emerges. NII gets a modest lift at the asset-sensitive money-centre banks (Check 1), which is why their shares held up while rate-sensitive sectors sold off. That lift shrinks as deposit betas rise (Check 2), so it is a 2026 story more than a 2027 one. Capital is ample at the big three (Check 3), so buybacks and dividends are not at risk from the hike itself. Credit is the lagging risk (Check 4) — watch card and commercial-real-estate charge-offs through early 2027. And valuation (Check 5) says the market has already paid for most of the good news at JPMorgan and less of it at Bank of America.
None of that is captured by a debt-to-equity ratio of 11. All of it is in the filings.
Frequently asked questions
Should I ignore the SELL verdict on banks entirely?
Ignore the financial-health pillar and the composite it drags down; read the quality and value pillars, which are computed from figures that do apply to banks. The verdict page shows all five separately for exactly this reason. And treat the momentum pillar as what it is — a description of the share price, not the business.
Do rate hikes always help banks?
No. They help asset-sensitive banks in the first year, hurt liability-sensitive ones immediately, widen everyone’s unrealised bond losses, and raise credit costs with a lag. The net effect for a given bank is in its own +100/−100 basis-point disclosure, and it differs widely between a money-centre bank and a regional one.
Where does the data come from?
Return on equity, price-to-book and P/E are computed on Investor Sam from each bank’s FY2025 10-K on SEC EDGAR. Net interest income, net interest yield, CET1 ratios, deposit balances and the rate-sensitivity figures are from the banks’ second-quarter 2026 earnings releases and 10-Q filings.
Sources
- JPMorgan Chase & Co., Bank of America Corporation and Wells Fargo & Company — Form 10-K for fiscal year 2025, via SEC EDGAR; ratios as computed on Investor Sam.
- JPMorgan Chase — second-quarter 2026 earnings release and Form 10-Q for the quarter ended June 30, 2026.
- Bank of America — second-quarter 2026 earnings release and presentation, July 14, 2026, and Form 10-Q for the quarter ended June 30, 2026 (interest-rate sensitivity disclosure).
- Federal Reserve Board — FOMC statement, September 16, 2026.