A (Semi) Complete Rundown Of The Banking Industry

by: Adam Stockmeister

After a near 2008 collapse (I suppose I shouldn't speak too soon), I believe financial stocks, and bank stocks in particular, are becoming ridiculously cheap (historically for those of us who missed/were scared of March 2009). I base this opinion on my belief that America will not fail nor default and that jobs will be preserved until a recovery is underway. Job preservation means the government or the Fed will save almost all banks on this list from total bankruptcy (though common shareholders will likely be wiped out in the future). Without further ado:

Name P/TBV Tier 1/RWA P/E
BOFI 1.01 12.41% 7.5
BAC 0.60 11.00% <0
JPM 1.07 12.40% 6.37
WFC 1.56 11.70% 9.40
MTB 1.98 9.52% 9.12
BK 1.95 14.10% 9.14
USB 1.93 11.00% 9.98
KEY 0.68 13.93% 6.90
PNC 1.02 12.80% 7.34
C 0.62 14.18% 6.99
STI 0.76 10.67% 22.67
FNFG 1.36 11.72% 25.13
Click to enlarge

In this jumbled mess of stats there appear to be a few obvious losers, a few recognizable names due to bailouts (and those still bailed out from 2009), and possibly a few interesting names. This is truly the kind of table only a math geek could enjoy.

BOFI Holding (NASDAQ:BOFI): I have discussed them twice so far; the first of which discussed their advantage in total expenses to deposits over any and all banks. Ben Bernanke has declared interest rates will stay at historic lows for at least 2 more years and BOFI will truly thrive. They are connected to regular banks and a few still don't believe in the business model which has kept their ratios particularly low. I discussed before their large allocation to MBS bought in 2009 and their high corporate bond holding as opposed to government securities which keeps their tier 1 ratio "out of whack" compared to other banks on the list who must impress Ben with their ratios.

Bank of America (NYSE:BAC): I am not a believer but Buffett is I guess, so who am I to argue? I worry that if any bank fails it will be BAC or Citi due to a disastrous 2008-2009 and the negative public opinion. A break up of assets and branches split between more than a dozen other banks would be the only outcome other than another bailout, though this time it seems the private sector can save Ben from saving more banks.

JPMorgan Chase (NYSE:JPM): This leads me to the successor company of the last man to privately bail out the system before Buffett, John Pierpont Morgan. Their numbers compare favorably to BOFI but have the size and diversification to survive a great diversity of downfalls in the industry. As an added bonus you get the great Jamie Dimon leading this storied corporation and at any price below $40 I see excellent long term value. I am considering a purchase of JPM in the near future. One concern is the incredibly large balance sheet that becomes nearly impossible to value with any degree of accuracy similar to the other banks making up the big 4.

Wells Fargo (NYSE:WFC): The summa cum laude of banks according to Buffett. They define deposit loyalty and regularly rank among the best in lowest cost deposits. As a caution (though Buffett doesn't seem to mind) they also regularly rank among the worst for lowest tier 1 capital ratios. You pay a premium at the moment for P/TBV and their P/E is only average. They manage non-interest expenses well for a bank their size due to the best management in the industry. This is also the best play on a potential housing recovery (with good portfolio diversification) and their normalized earnings power (though impossible to estimate effectively) is likely much greater than the earnings we are currently seeing. This is the only other bank on the list (other than JPM and obviously BOFI) that I would consider purchasing at these levels.

M&T Bank (NYSE:MTB): Another Buffett favorite (like a few others on the list), MTB owns a de facto monopoly throughout upstate New York and the Rust Belt. They are growing assets and deposits at favorable rates, have a high loyalty rate and the cities that represent the majority of their deposits were relatively unaffected by the 2008 housing collapse. Although fairly valued compared to other banks at the moment, MTB is a good watch list candidate for long term investors.

The Bank of New York Mellon (NYSE:BK): Bank of New York Mellon is a fantastically run bank that thrived through the housing crisis. They received a small sum in TARP relative to other banks of similar size. Though growth in many aspects can be questioned, their tier 1 ratio (conservative indicator) and P/E is on par with a great investment. At this time I don't see the reason for overpaying for TBV when other banks with similar operating characteristics are performing just as well.

U.S. Bancorp (NYSE:USB): I'm sure you are as sick of reading as I am of typing this, but this is another Buffett stock. They were amongst the first tier of banks to repay TARP and are generally conservatively run similar in many aspects to BK. They have a large Midwest presence (the only part of the country adequately growing now and for the foreseeable future). Their valuation metrics are worse than BK in all aspects and again I see no reason to pay a premium for a well run bank at a time when the entire industry is selling for well below fair value.

Keycorp (NYSE:KEY): Now to the disaster banks in my opinion. Key bank seems on the brink of bankruptcy and is a likely buyout candidate due to their presence in many sought-after areas throughout the US. They are heavily levered to the residential real estate market and a slow housing recovery could continue to cripple their balance sheet. Their valuation metrics are outstanding due to the market discounting continued TBV erosion and possible net income losses. I see no reason for a turn around, especially in a low interest environment.

PNC Financial Services (NYSE:PNC): A great play on the Mid-Atlantic region similar to MTB. They see a significant portion of earnings from wealth management which is generally a stable earnings source. Due to long term low interest rates, their asset management firm will likely see abnormally low earnings and hurt this highly levered bank to the field. This is more of a play on rising interest rates than anything else, which does not seem likely for quite some time.

Citibank (NYSE:C): The most confusing and likely the second most risky bank in America. Citibank is known to be historically aggressive in banking and creative in financial products. I see their balance sheet as more confusing and dangerous than BAC which says quite a bit. Their current valuation is extremely low and likely provides a better long term risk-reward opportunity than BAC though the risk aspect is substantial. I have no opinion and may you sleep well if you are invested.

SunTrust Banks (NYSE:STI): You may have seen a commercial or two over the past few years but the banking side has not changed. As the southern housing market continues to struggle so does STI. There does not seem to be a light at the end of this tunnel as earnings have stagnated and expense seems to rise with revenues. They provide no leveraged play and seem to struggle with every decision the Fed makes. Their decision to sell an extremely large Coca-Cola stake in 2008-2009 shows management's failure to navigate with a long term outlook in my opinion.

First Niagara Financial Group (NASDAQ:FNFG): The main competitor to MTB in Buffalo, NY in a constant losing battle. They have been aggressive as of late, purchasing a large number of upstate assets from HSBC though their valuation metrics are absurdly high compared to much better run and competitively strong banks. I see FNFG as a likely buyout target due to their branch network but no other reason to buy equity in them.

My short summary of the largest banks was to display the incredible buying opportunity currently at hand. I see JPM as a great buy based on banking customers, diversity of earnings and strong management that I believe rivals or tops WFC. On the other hand, WFC comes with a strong recommendation from two investors much more qualified than I (Warren Buffett and Charlie Munger) so I defer to more qualified individuals in also recommending WFC which comes with top-notch depositor loyalty and a diversified portfolio that will grow earnings until the housing market allows WFC to truly thrive like no other bank. Finally, I believe BOFI is the single greatest bank to purchase at the moment. Recent deposit growth, loan growth (with an excellent loan value ratio; a strong representation to their conservative loan practices), and finally strong management. They managed to hold off from raising capital (while growing earnings and assets) throughout the 2008-2009 crisis and have raised equity or capital only when a strong reason presents itself. Their valuation compares favorably to every bank on this list with the one caveat that they are a much stronger bank with the Fed promise of low interest rates as described here.

Disclosure: I am long BOFI.