If investors are interested in looking at large banks to add to a long-term portfolio, one might consider observing two types of ratios: Price Ratios and Financial Ratios. This would be a good starting point to observe which banks may make a better investment. Let's take a look at four of the largest banks and see how they compare side-by-side.
When we compare price ratios of these companies with the industry, we are looking for value; we are looking for the best "bang for our buck." With the four price ratios we are looking at, the lower the ratio the better because that means were getting the best value for our money. Let's compare these four largest banks and see which bank makes the best investment by price ratios.
The price to earnings ratio (P/E ratio) lets us know what an investor is willing to pay for one dollar of the company's earnings/profit. If one is interested in earnings, it appears that JPMorgan (JPM) has the lead and Wells Fargo (WFC) comes in a close second as both are well below the industry average of 28.2. In fact, Bank of America (BAC) looks like a terrible investment if one is interested in earnings. How much is an investor willing to pay for one dollar of a company's sales? This is what the price to sales ratio tells us and all four companies appear to be doing much better than the industry average. While JPMorgan and Wells Fargo appear to be the best for earnings, Bank of America comes in first here. Citigroup (C) comes in a quiet second and appears to look better when we look at both ratios together.
How much is an investor willing to pay for one dollar of the company's assets? Bank of America and Citigroup take the lead here again while JPMorgan and Wells Fargo come in a distant third and fourth, respectively, just like they did at the price to sales ratio. And how much is an investor willing to pay for one dollar of the bank's cash flow? JPMorgan and Wells Fargo continue to beat the industry on this and come in first and second, respectively, while Citigroup and Bank of America are both more expensive than the industry average here.
So what is this telling us? Even though it may cost JPMorgan and Wells Fargo more money to make money, they are doing a much better job keeping their money and making a profit than Bank of America and Citigroup, according to these ratios. If I had to give an edge to anybody I guess I would give it to JPMorgan & Chase Co.
Not only am I interested in how well the company is able to make a profit, but I am also interested in its financial condition. To observe this, I might look at three different financial ratios compared to the industry in order to determine how strong I think these companies are financially.
The first ratio, the debt/equity ratio tells me how much the company is using debt to finance its operations. The higher the ratio the more debt is being used, and the less happy lenders would be. The winner here by far is Wells Fargo, which comes in at less than half of the industry average while the other three are either equal or higher. JPMorgan is much higher than the industry average.
The leverage ratio gives me idea as to what extent the company relies on debt for its financing. The higher degree of leverage ratio, the riskier a company is considered to be. A ratio of 2 to 1 is usually at the upper acceptable limits. None of our companies come within that limit and all four of them are well below the industry average. Wells Fargo came in on top again and JPMorgan came in last. This is understandable considering where its debt to equity ratio is. In the concept of book value per share, if the book value is higher than the share price, it is usually considered an undervalued stock.
Current Stock prices:
- JPMorgan Chase 48.58
- Bank of America 12.21
- Citigroup 43.56
- Wells Fargo 37.02
The only company that has a higher book price would be Wells Fargo here. Bank of America and Citigroup appear to have the best ratios compared to the price of their stock, but JPMorgan also looks like a good buy according to this one ratio. Overall, when I look at the financial conditions of the companies, I think I would have to give the edge to Wells Fargo with Citigroup coming in a quiet second.
Just making observations in the side-by-side comparison of these two groups of ratios with these four banks, I think I would have to give an overall edge to Citigroup. Although it doesn't take the lead, it quietly comes up in second place quite often and looks to appear at the top in all seven categories more often than the other four banks.