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Introduction

In the banking sector today, while many are on the path to recovery, there seem to be numerous surprising singular events which are plaguing the reputations and operations of many banks. In this article, I take a look at the performance of the "Big Four" U.S. banks, along with the political drama which threatens to erode their reputations. JPMorgan Chase & Co (NYSE:JPM), Bank of America (NYSE:BAC), Wells Fargo & Co (NYSE:WFC) and Citigroup (NYSE:C) will be the Banks on which I focus.

Tracking Financials

Indicator

JPMorgan Chase & Co

Bank of America

Wells Fargo & Co

Citigroup

Market Cap

$162.9 bil

$114.5 bil

$173.9 bil

$111.2 bil

Trailing P/E

9.1

29.4

10.39

15.8

Price/Book

0.9

0.5

1.2

0.6

Earnings Growth

76.9

−73.5

59.1

-

Dividend Yield, %

2.81

0.38

2.35

0.11

Debt/Equity

1.3

1.3

0.9

1.5

Return on Equity

9.9

1.9

12.7

4.0

Current Price

$42.81

$10.58

$33.14

$37.60

Estimated Fair Value Range

$68-$119

$10-$31

$58-$85

$7-$71

Stock Valuation

Undervalued

Fairly Valued

Undervalued

Fairly Valued

Upside Potential (Premium) to Reach a Fair Stock Value

60%

--

75%

--

Data from Morningstar on Dec. 15, 2012

JPMorgan Chase & Co: At first look, JPM looks to be a better buy straight away, and rightly so. The company's frugal and intricate operation has allowed it to borrow less than its rival banks during the same period of financial meltdown, and the favorable payoff is continuing to provide the company with faster route along the path to recovery. Out of the four banks, JPM's management is most efficient in producing profit from capital invested, as is suggested by the superior ROE. Debt/Equity remains a concern for JPM, even though it is on a par with the best of its competitors; the company must aim to bring the ratio below 1 eventually. Unless it manages to do so, its debt rating will remain low and the company will be paying higher interest rates on loans. As far as profitability goes, JPM's Q3 revenue and income were flat and reflective of the past four quarters. As we await Q4 financial filings, many investors will be looking for the perfect opportunity to latch onto this steamrolling stock. The company's three-year average for EPS Growth and the current dividend yield are both head and shoulders above the competition.

Bank of America: On the other hand, BAC has shown much inferior performance earnings-wise. The stock metrics offer little incentive for investors to have confidence in BAC, but recent cost-cutting and streamlining may offer a better outlook for next quarter's results, continuing into 2013. It is also a required change, bearing in mind the company's dismal ability to generate profits from the available capital and the negative growth for investors. While a P/E of 28.7 leaves BAC undervalued, the time required for the realization of its potential upside remains the pivotal unanswered question. The inefficient management of BAC will not be providing investors with any incentive to have confidence in the future, but if "Project New BAC" starts showing signs of progress, BAC could become an interesting option.

Citigroup: C is continuing to cut jobs in order to complete its cost-reduction program and prevent inefficient functioning. It is reported that Citi's job-cut program will cost $1 billion in Q4 2012 and a further $100 million in Q1 2013. On the upside, however, this step is also expected to reel in savings of $900. These cost-reduction programs will indeed be necessary for Citi in 2013, as its debt/equity is even worse than its competitors, which were also caught in the financial meltdown. While investors can expect a drop in earnings for Q4, Citi's fortunes can be expected to change in 2013. A P/E of 15.4 suggests that the stock is undervalued, and will gain price on the stock market midway through 2013.

Wells Fargo & Co: WFC's margins are incredibly strong, which make them a firm bet for investment. Furthermore, the title for generating revenue from efficient management also goes to WFC. The bank's operational structure is different from its competitors in that its investment banking is not as vivid as the others. Instead, WFC's primary product is mortgage lending. As with every other bank, it seems WFC has also had bad publicity due to the massive $11 million insider-trading ring. However, the bank's strong profits and numbers stand tall to defend the bank's performance and integrity. Its EPS performance is only overshadowed by the resurgent JPM, and a debt/equity of 0.9 is certainly not ideal, but is well below the competition's. The bank's strong financial position has not assured a stable, upwards price trend on the stock market, due to the highly volatile nature of the industry.

The discounted earnings plus equity model, developed by EFS Investment Partners and applied to the three competitors, suggests the following: currently both stocks of JPM and WFC are undervalued, whereas both C and BAC are fairly valued. In addition, EFS's fair stock price valuation indicates that JPM and WFC stocks have at least 60% and 75% upside potential to reach their fair value range, respectively.

What Does 2013 Have In Store For the Big Four?

JPM's relatively solid position will continue to gain strength in 2013, but there remains a serious threat to the company in the shape of court proceedings and taxes. The company has a new CFO after its "London Whale" episode, but that will do only so much to reassure investors. With the company caught in a tax-payment debacle in the UK, this is expected to cost the bank around £500 Million. Furthermore, the bank's power trading rights in the U.S. have been restricted due to allegations of price manipulation. The bank's mortgage business is growing, and I expect the stock to offer an improved dividend in January.

Bank of America fared 3% lower than its 2010 score of 66 on the American Customer Index, which makes it the least popular bank in America, and its customer satisfaction ratings are at an eleven-year low. Mortgage payments are still a mighty weight on the bank's balance sheets, and by February 2013, Bank of America will have spent $15.8 billion as part of the settlement. The sooner the bank can get done with this settlement the better, as it needs to focus on goals and concerns for the future, not outcries from the past. BAC is still being held back by its toxic loan portfolio and repercussions of the Countrywide Financial acquisition.

Wells Fargo is a robust option which has been rewarding shareholders well during times of crisis. With over 6,000 branches around the U.S., it remains an unchallenged choice for anyone looking for a house. The bank has had an amazing performance, but much of it is to be attributed to the improvement in the housing sector. Unlike its peers, WFC is not reliant on direct consumer lending, i.e., imposing fees and increasing deposits. Instead, as the housing market picks up, so does the demand for WFC's products. There is a downside, however, with the supposed "fiscal cliff" looming. WFC could take a hit in terms of dwindling demand if the economy fails to respond to the government's latest measures.

Citigroup has put a plan in place to cut 11,000 jobs. This number is massive, and while job cuts are never welcomed in any circles, this will definitely help the bank cut down on its costs. After it failed the "stress test" of 2012, investors will be eagerly awaiting the central bank's decision on allowing Citi to offer higher dividends or set buybacks into action.

Make or Break for Investors

Next year will be the jump-start the banking industry badly needs, but it remains to be seen who will make the most of this year of transition. At a time when the media event of a "fiscal cliff" is mentioned more often than the daily weather updates, austerity is undoubtedly the need of the hour. While Citi has unequivocal financial and stock results, its recent job cuts and streamlining leave it with massive potential to improve next year. The same cannot be said for BAC, whose "Project New BAC" has not reeled in any significant reports so far. JPM, on the other hand, needs to steer clear of the courts and employ a more effective profiteering strategy.

Final Verdict

In my opinion, fairly valued Citigroup is a risky but worthwhile stock investment for 2013, and this is also reinforced by Morningstar estimates. Citigroup's extreme measures are expected to reap rewards sooner than one would expect from such a large organization. The company's resolve to bounce back is unquestionable, as is shown by the streamlining put in place; this also makes it the favored banking stock for investors of today. Citi's stock has seen appreciation in price worth more than 67% since January 2012, and this trend is expected to accelerate in 2013 due to improving profit margins.

Source: Which Banking Stock Is The Least Troublesome, Most Profitable Bet For 2013?