In this article, we continue our examination of Goldman Sachs (GS), JPMorgan (JPM), Citigroup (C), and Bank of America (BAC). We'll examine the profitability, solvency, quality of management, and revenue relationships. Readers should refer to previous articles to gain perspective on this article.
Goldman Sachs' profit margin declined between 2009 and 2011: For the first six months of the year, the profit margin was 15 percent, up from 2011's profit margin of 12 percent. JPMorgan's profit margin increased between 2008 and 2011: The profit margin for the first six months of 2012 was 34 percent, up from 2011's profit margin of 31 percent. Bank of America's profit margin was below 10 percent between 2008 and 2011: Currently the bank's profit margin is 11 percent. Citigroup's profit margin has been increasing since 2008 and is now up to 17 percent. JPMorgan is the most profitable financial institution followed by Citigroup, Goldman Sachs and Bank of America.
The trend of the financial leverage of these four financial institutions is towards lower financial leverage. The use of financial leverage magnifies the effect of changes in EBIT on returns flowing to equityholders. JPMorgan and Goldman Sach's changes in EBIT impact the returns to equityholders more than Bank of America and Citigroup's. In other words, if you think EBIT is going to increase, you want to be invested in the firm or firms with higher financial leverage.
(click to enlarge)During the first six months of the year, financial leverage continued to decrease. Changes in EBIT will have less impact on returns to shareholders. Further, Goldman Sachs and JPMorgan continue to have the highest financial leverage ratios.
The absolute level of return on assets for the four firms is low. That said, JPMorgan has been able to increase its return on assets. Citigroup is also doing a pretty good job of increasing return on assets. Return on assets measures how well management is using assets to generate earnings. The trend continued into 2012.
Goldman's return on assets and return on equity is decreasing. JPMorgan's return on equity is increasing. Citigroup is doing a decent job of generating returns on equity. Return on equity measure how well the firm is using equity to generate income: It also is a measure of the quality of the firm's management.
Since the end of 2008, JPMorgan and Bank of America's sales as a percentage of total sales increased. However, in 2011, Bank of America's revenue share declined from the 2010 level. JPMorgan went from 22.9 percent to 25.9 percent. Bank of America went from 26.9 percent to 28 percent. Citigroup declined from roughly 33 to 30 percent. Goldman Sachs declined from roughly 17 to 15.5 percent.
In the first quarter of 2012, Citigroup's share of revenue continued to decline. Bank of America's share declined to 26 percent and JPMorgan's share declined roughly 100 basis points. Goldman Sachs was the big winner in the first quarter with revenue jumping to almost 20 percent of the total revenue.
In the second quarter, Goldman's share declined to 16 percent. JPMorgan's share got back on track rising to over 26 percent. Bank of America continued its slide to roughly 26 percent. Citigroup increased its share to roughly 31 percent.
Looking forward, JPMorgan could have roughly 26 to 27 percent of total revenue for the year. Goldman Sachs should be in the 16 to 17 percent range. Bank of America's share of revenue should continue to decline and finish the year at roughly 26.5 percent of total revenue, that's an optimistic forecast. Citigroup is holding its own and may maintain a roughly 30 percent share of revenue. In other words, JPMorgan is expected to continue to gain market share, Bank of America is forecasted to continue to lose market share, Citigroup should maintain market share and Goldman Sachs should increase revenue as a percentage of total revenue.
Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial advisor. Christopher Grosvenor does not know your financial situation and ability to bear risk and thus his opinions may not be suitable for all investors.