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In this article, I take a look at Citigroup (NYSE:C), Bank of America (NYSE:BAC) and JPMorgan Chase & Co. (NYSE:JPM), three financial services companies that may offer investors upside potential that outweigh the risks. We'll use the management effectiveness ratios (return on assets, equity & investment), book value-share, price-sales, price-book value, etc., to evaluate Citigroup, Bank of America and JPMorgan Chase.

Additionally, macro-economic indicators are provided at the end of the article. As part of investment analysis, analysts should consider both the company fundamentals and the macro-economic landscape. The macro-economic picture in the U.S. is deteriorating. In Europe, the economy is contracting.

European officials are working towards recapitalizing the banks in Spain. Also, European officials are investigating pro-economic growth policies that would reduce the sovereign risks the region is facing. Until pro-growth policies are implemented and Spain's banks are recapitalized, sovereign risks remain.

For those of you following me, you'll note that I have been bearish on shares of financial companies for months. I did briefly turn bullish with the expectation that equities would rally sharply; that expectation has turned out to be incorrect. Currently, I am bearish on the "risk-on" trade, and I may remain that way for an extended period.

Rating System

Buy - Be long

Neutral - No Position

Sell - Be short

(The ratings, research and analysis in this article should be considered as starting point for further research.)

Bank of America - Sell

Company v. Industry (TTM)

  • Return on Assets: 0 v. 0.56

  • Return on Investment: -- v. 0

  • Return on Equity: -0.61 v. 8.62

(Management effectiveness ratios courtesy of Thompson Reuters)

Bank of America's share price has declined substantially from its 2011 & 2012 highs. Additionally, revenue-share and book value-share are declining. Typically, financials are early cycle leaders. That being said, given the decline in the "market" and the current valuation, I'm bearish on common equity shares of Bank of America.

With regard to the capital buffer, Bank of America has a 10.8% tier-one capital ratio according to the financial statements released in April 2012. That means the firm is leveraged roughly 9-to-1. I consider the leverage ratio to be too high although the financial regulators consider the leverage ratio to be appropriate.

According to the firm's financial statements, tangible book value-share is $12.87. What that says is the firm is trading at roughly a 45% discount to tangible book value. In other words, the market isn't thrilled with the growth prospects of the institution. I think the market's perception is correct.

Revenue in the first quarter declined 17 percent. Further, the firm's financial leverage ratio is 9.38; Bank of America uses a lot of leverage. Additionally, the enterprises posted poor quality earnings in the first quarter of 2012.

Shares of Bank of America are trading at the declining 50-day simple moving average. The trend is down.

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Book value-share is declining; the decline is considered bearish.

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Share price is declining; the decline may be limited as valuations may be near a bottom.

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Price-sales is declining; should the valuation metric begin to rise, Bank of America could double in value based on price-sales.

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Price-book value is declining; the valuation metric may be near a bottom.

Citigroup - Sell

Company v. Industry (TTM)

  • Return on Assets: 0.57 v. 0.56

  • Return on Investment: -- v. 0

  • Return on Equity: 6.08 v. 8.62

(Management effectiveness ratios courtesy of Thompson Reuters)

Citigroup's common equity share price has declined substantially from its 2011 & 2012 highs. Additionally, book value/share is increasing although management is ineffective based on the management effectiveness ratios. Typically, financials are early cycle leaders. That said, given the decline in the market and the current valuation, I'm bearish on common equity shares of Citigroup.

Citigroup has a tier one capital ratio of 12.4% according to the financial statements released in April 2012. That means the firm is leveraged roughly 8-to-1. I consider Citigroup's leverage ratio to be too high although the financial regulators consider it to be appropriate.

According to the firm's financial statements, tangible book value/share is $50.90. What that says is the firm is trading at a 50% discount to tangible book value. In other words, the market isn't thrilled with the growth prospects of the institution.

Shares of Citigroup are trading below the declining 50-day simple moving average. The trend is down.

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Book value-share is increasing; the increase is considered bullish.

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The common equity share price of Citigroup declined to the 2011 support zone. In other words, the share price is suggesting a bear market could be near.

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Price/sales has been declining; the valuation metric could increase as sales decline.

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Price-book value is declining and may increase as book value declines.

JPMorgan Chase & Co. -- Sell

Company v. Industry (TTM)

  • Return on Assets: 0.83 v. 0.56

  • Return on Investment: -- v. 0

  • Return on Equity: 9.84 v. 8.62

(Management effectiveness ratios courtesy of Thompson Reuters)

JP Morgan's common equity share price has declined substantially from its 2011 & 2012 highs. Additionally, book value/share is increasing and management is effective based on the management effectiveness ratios. Typically, financials are early cycle leaders. That said, given the decline in the "market" and the current valuation, I'm bearish on common equity shares of JP Morgan.

JP Morgan has a tier one capital ratio of 12.6%, according to the financial statements released in April 2012. That means the firm is leveraged roughly 8-to-1. I consider JP Morgan's leverage ratio to be too high although the financial regulators consider it to be appropriate.

According to the firm's financial statements, tangible book value/share is $34.91. What that says is the firm is trading roughly equal to tangible book value. In other words, the market isn't thrilled with the growth prospects of the institution.

Shares of JP Morgan are trading below the declining 50-day simple moving average. The trend is down.

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Book value-shares is increasing; book value-share is expected to decline in the coming quarters.

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The share price has declined recently; the price of shares could decline farther as US equities enter a bear market.

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Price-sales is declining; the valuation metric may increase as sales decline.

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Price-book value is declining; the valuation metric may increase as book value declines.

Macro Environment

ISM Non-manufacturing PMI is declining; the decline in non-manufacturing PMI is considered bearish. ISM non-manufacturing PMI should stabilize in the coming months.

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The pace of job growth has slowed in recent months and may stabilize at low levels.

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CB consumer confidence is increasing and may decline in the coming months. The Expectation Index and the Present Situation Index both declined according to the latest report.

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European Union services PMI is declining and should increase in the coming months.

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European Union manufacturing PMI is declining and should increase in the coming months. A silver lining from the current release of the report is that the pace of decline in Italian manufacturing is slowing. Additionally, the depth of the contraction in manufacturing has yet to reach the depth of the contraction from the financial crisis in 2009.

Source: 3 Overvalued Bank Stocks