The majority of large financial institutions have lost a significant amount of value over the last 3 months. There have been several reasons for the loss in value which include: high unemployment, problems raising capital, Europe’s financial crisis, lagging real estate market, delinquent loans, bankruptcies, and fear of another recession among several other reasons. The stocks that have lost value are each exposed to one if not all issues that have negatively affected the banking industry. But some companies have been exposed more than others yet most stocks in this industry have trended considerably low without taking into consideration individual company performance. Below is a look at two of the largest financial institutions in the United States. Both companies have posted a large amount of loss yet both companies are significantly different therefore I have included financial, stock, and performance information along with my opinions regarding the future of these two companies.
Bank of America (BAC) has been hit the hardest among all large companies over the last 6 months. It has lost 55% of its value during the last 6 months including more than 20% over the last month. The stock trades with a market cap of $64 billion a price of $6.16 a share, which is significantly lower than its book value per share of $20.29. The company has the largest in assets of any other financial institution in the United States with more than $2.2 trillion. However, the company returns a loss on its assets of 0.66% because of so many bad loans and acquisitions or other toxic assets. The company returns a negative 6.73% on equity and a net loss from its income statement of 21%. I believe the company is far from profitability and has not proven itself to be affective. A large portion of the company’s financial situation is a result of bad business decisions yet some of its bad fortunes are a result of a bad economy. BofA is the largest of consumer banking companies in America, and it has been exposed to the majority of bank related issues within the economy such as: foreclosures, bankruptcies, delinquent loans, and problems raising capital with unemployment over 9%. This company is a financial institution that relies on the strength of the overall economy to drive its financial growth. It has a worldwide presence which has hurt the stock over the last few months with recession fears spreading.
The company will always place a high priority on consumer banking yet I believe the company is attempting to make a transition into the commercial banking industry with the promotions of two executives that have each had successful careers within the commercial side of banking. There have been several rumors regarding the number of employees that BofA plans to layoff, with the numbers ranging from 10,000 to 40,000, in addition to several branches the company plans to close. This decision along with it selling several of its large assets, show that it’s adjusting its operational strategy. Yet until I see that the economy is either improving or that the bank is posting a profit I do not believe a purchase of its stock would be wise. Several investors have purchased this stock in an attempt to capitalize on its value, however I believe the stock has all the signs of long term organizational issues that could take years to correct. Therefore I believe the stock could drop lower and may take years to fully recover. And if the situation in Europe or China were to worsen than this stock could easily drop to prices much lower. There may be value with this stock, but at this time I am not willing to take the chance, the company simply has too many issues.
Citigroup (C) has lost 35% of its value over the last 3 months including more than 12% during the last month. Citigroup trades with a market cap of $73 billion, for the last 12 months it’s recorded $63 billion in revenue including a profit margin of 15.57%. The company has assets of nearly $2 trillion and a book value per share significantly greater than its stock price at $60.33 for its most recent quarter. The stock is trading with a price to earnings near 8 and has a forward P/E of 5.43 which means the company is expected to increase earnings by a substantial amount. Citigroup has been hit hard by the recent selloff within the market losing a large portion of its value, trading near 52 week lows. But as I look at the company’s income statement and balance sheet I have been unable to find a fundamental reason that would validate this large loss in value.
The company has a strong presence in all areas of banking but I consider the bank to be a global leader in commercial banking. I believe the fact that the company has such a large global presence has hurt the stock during the last 3 months, as investors fear the company’s exposure to global debt could have an effect on the company’s financial performance. And while the company does have some exposure to sovereign debt the amount is still limited as Citigroup is primarily a bank concentrated in the United States with several branches spread throughout the world. I believe this stock presents a substantial amount of value with strong fundamental performance and an expectation to continue with strong financial performance despite questions within the economy.
Both Citigroup and Bank of America have lost a large portion of value over the last several months. Yet I believe the two companies are very different and should not trade on similar paths. BofA does not return a profit through any of its largest revenue streams yet Citigroup is returning high profits through several of its revenue generating segments. The two companies are far from one another and operate in a much different way. BofA has a strong presence in consumer banking while Citigroup’s strongest area is its commercial banking. It shows the strength between the two areas and it should be expected that BofA would post a higher level of loss compared to Citigroup. BofA is more exposed to foreclosures, delinquent loans, bankruptcies, and capital raising issues with one reason being high unemployment. And while Citigroup is exposed to many of the same economic hardships I believe its exposure is limited in comparison to Bank of America.
I believe Bank of America has a long way to go until reaching a level of profitability such as Citigroup. And that its fundamentals could get worse before getting better, therefore, I would not purchase shares in BAC. There are still too many changes that need to be made and while laying off employees and selling assets may provide immediate gratification for the company it will not solve the long term issues that plague its financial health. The company is heavily reliant on the strength of the economy and until it improves I do not believe the company will increase capital by the margins at which it must to operate at an efficient level. Yet Citigroup is proving that its business plan is working in a rough economy therefore as the economy improves I expect Citigroup to post large gains. The unfortunate factor for both companies is the sector in which it trades and the fact that the worst financial recession since the Great Depression was in 2008 or 3 years ago. Psychology plays a big role in how investors trade these stocks, trading them as one rather than by individual company performance. So while I believe that Citigroup is a good investment I do not believe it’s wise for the short-term trader but rather the long-term investor who has time to let the economy recover which should allow Citigroup’s true value to reflect through its stock price.