Rocky market conditions, budget impasse uncertainty and poor risk management: these are just a few obstacles facing the banking sector on its road to recovery. With CEOs being criticized considerably, the banking sector is up in the air at the moment. Q4 2012 results have capped an end to a strange and transitory year for the four largest American banks.
In this article, I take a look at the roller-coaster rides of the following institutions: JPMorgan Chase & Co (JPM), Citigroup Inc. (C), Bank of America Corp. (BAC), and Wells Fargo Corp. (WFC). By Q3 2012, each bank only had one focus area - disciplined management. Downsizing, streamlining and reducing expenses has been the order of the day and continues to reign supreme. As the big four finally broke into profit, their eventual aim of delivering a solid performance for shareholders continues to be an elusive dream.
Financial and Stock Analysis
Here I'll take a look at the financial and stock metrics of the big four banks while assessing current realities for each of these companies.
(3 Yr Avg)
Dividend Yield, %
Return on Equity
Upside Potential to Reach a Fair Stock Value
Data from Morningstar and Financial Visualizations on Feb 6, 2013
The discounted earnings plus equity model, developed by EFS Investment Partners and applied to the four competitors, suggests that currently all stocks (except of BAC) are well undervalued. In addition, EFS' fair stock price valuation indicates that currently Wells Fargo is trading at the most attractive discount.
JP Morgan is currently trading at about $49 but it is still facing difficult times ahead. As if 'London Whale' had not done enough damage to the bank, it now faces major regulatory action from the Federal Reserve regarding anti-money laundering. However, the bank boasts a high ROE on the back of a positive Q4 2012, due to extensive downsizing and streamlining. The year 2012 was financially solid for JPM, but the bank remained in headlines due to a multibillion-dollar trading loss stemming from bad bets on derivatives. The crisis of 2009 still holds a large spot on the company's balance sheet as underlined by its debt/equity ratio of 1.3. In a rare sight of transparency, the company's board voted in favor of releasing the 'London Whale' report, costing JPM around $6 billion.
The disappointing story continues with Citigroup, whose CEO asked analysts to lower the bank's Return on Asset after unveiling results which fell far short of forecasts. While its Q4 2012 new income rose 25%, the per-share earnings were far less than earlier anticipated. The Citi stock, much like the rest of its peers, has no allowance over offering a dividend and has no positive earnings growth when averaged over the last three years. The bank, which earlier announced its plan to eliminate 11,000 jobs and close branches across the world, blamed regulatory costs for the bank's performance as the company posted $2.32 billion in charges for layoffs and lawsuits. Citi has a lot of cleaning up to do before it can start progressing forward again. Compared to its rivals, a debt/equity ratio of 1.5 seems reasonable, but from absolute standards the bank is not on solid ground by the looks of its balance sheet.
Bank of America reported a 63% drop in fourth-quarter profits after making payments to settle legal claims over its mortgage business. There is hope, though, as profits jumped to $4.2 billion from just $1.4 billion a year earlier. With home loan payments finally made, the bank may be able to make a steady exit from the storm. At $11.88, it is the cheapest of the four options being explored in this article. Its negative earnings growth is well-documented already and with claims for CountryWide's dreadful loans finally put aside, BAC has the opportunity to capitalize on its resources and jack up its stock price as is also supported by the P/E associated with it. In total, the bank has so far cut 267,190 jobs since its downsizing brigade began.
Wells Fargo posted earnings of $5.1 billion in Q4 2012, a 24% increase from the previous year. The bank largely concentrates on mortgage lending and has seen its earnings bolstered by a surge in mortgage lending, driven in part by a series of federal programs that have helped drive down interest rates. As homeowners capitalize on the low rates, WFC is receiving tons of refinancing applications. The bank is highly effective in generating profit from the resources employed, as reflected by the increase in its mortgage lending, number of deposits and the ROE value. Its earnings growth and debt/equity are both commendable keeping in mind the difficult market conditions which currently surround the banking sector. The bank's mortgage-focused model may be more effective in generating profit and improving metrics. With the government stepping in by reducing interest rates, the mortgage-focused model is preferred by customers as compared to its rival banks. Earlier in January, the bank also raised its dividend for investors to 25 cents per share.
Make or Break for Investors
As is obvious from the uncertain nature of the banking sector at the moment, there is no clear winner or loser. Instead, we can use the information discussed to decide which are the biggest and smallest losers. Five years after the financial crisis began, the banking sector is still dragging its heels, making one wonder if the situation is actually getting better for the banks or if they are sinking further into the whirlpool. Compared to its major competitors, Wells Fargo is in a relatively stable position, but its organic growth is questionable due to the government's aid in stimulating the housing market and mortgage loans. The remaining three banks, however, have an array of problems surrounding them. In my opinion, the dip in share price for Citi and JPM provides a unique opportunity for investors to buy on the cheap as the two are prime candidates for a resurgence in sales and also stock market. In the short-term, however, BAC or WFC may be better options.
Morningstar provides the following ratings for the four banks. JPM - 3/8 buy, 3/8 hold, 1/8 underperform, 1/8 sell. C - 3/8 buy, 3/8 hold, 1/8 underperform, 1/8 sell. BAC - 7/8 hold, 1/8 sell. WFC - 2/8 buy, 1/8 outperform, 5/8 hold, 1/8 underperform.
Uncertain times lead to confusion, but may also provide opportunities for great rewards. The risk is worth taking for JPM and Citi due to their proven potential and effective downsizing.