Currently the four largest U.S. banks offer great value for money. But with the loss of the Swiss National Bank's political will to keep the Swiss franc weak, a round of European Central Bank QE to inflate (competitively devalue) the Euro, it seems monetary conditions have tightened in the U.S., as evidenced by the fall in 10-year treasury yields. Which major bank can withstand tighter conditions? And is one poised to claim the future?
Below are stock prices/market caps for the four American banks with over $1 trillion in assets: Wells Fargo & Co. (NYSE:WFC), JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corporation (BAC) and Citigroup Inc. (NYSE:C). Since the Great Recession, bank stock prices & market caps have regrouped, approaching their pre-recession levels (BAC is the exception).
On every valuation metric, these four banks look fairly valued when viewed in context of their 10-year history. In fact, these valuations haven't recovered fully to their pre-recession levels, most likely because growth in housing fueled more expected growth before 2008. Even so, aside from BAC's tough year in regards to net income, p/e ratios look good. WFC has a higher valuation in regards to sales & book value, but simply because it over-performs in generating net income from its sales & assets.
Banks are a hard nut to crack when it comes to cash generation. One of the more trustworthy stats in determining the ability of a bank to generate sufficient cash is whether it can maintain a dividend. WFC and JPM stand out for their strong dividend payments over the last 4 years. BAC and C don't look as healthy - and perhaps deserve their lower valuations based on price/book ratios.
Revenues & profits have followed a similar pattern, though JPM & WFC stand out with the best upward-facing trends since 2008, especially in terms of net income. On the right, we can compare the running total of net income over the last five years with market cap. Though WFC has a higher valuation, JPM has brought in a sum total of $6 billion more in net income. But the last two years have been better for WFC.
Below are balance sheet percentages (of total assets). Here we're looking for any warnings signs that one of our massive banks might be at risk if monetary conditions tighten further. In fact, all of our banks seem to be converging over time. C has been building more equity (starting from a lower level). All the banks saw spikes in long-term debt (as a % of assets) at the height of the financial crisis, then have moved to a far lower level now. WFC & C stand out for having better debt-to-equity ratios now than before the crisis. Though with the convergence, it doesn't seem like JPM or BAC should maintain ultra-low debt in light of their peers'.
Below are the same metrics, but swapping rows and colors to we can see intra-company patterns for comparison.
As far as valuations and profits go, BAC and C look cheap, but WFC and JPM have the best trends in net income, more than justifying their higher valuations. If monetary conditions do continue to tighten (and I remind you that this is not just a Federal Reserve question: Yellen may want to do more QE / extend expected zero-interest-rate policy to ease conditions when faced with a Euro devaluation, but may face too much political pressure not to), then you'll want the strongest banks in your portfolio.
Because of the sheer size of these banks' balance sheets, they have an implicit guarantee of government backing. But there are numbers, and there's politics. Last time we had a massive bank bailout, torches were lit and pitchforks raised. Will the government summon the courage to act in the face of massive popular dissent? In the case of further deflationary pressure, I like WFC with it's (maybe) government guarantee and it's more-important Warren-Buffett guarantee.
And if I'm wrong and monetary conditions loosen, WFC also seems like the one bank poised to take advantage of increasing credit. Indeed, looking at loans on the balance sheet, WFC is the only bank brave enough to be using deposits to increase loans rather than pay down debts.
Because of its valuation, implicit guarantee from both the government and Warren Buffett, and its comparative aggressiveness in pursuing new loans, WFC is the bank stock to own.
Disclosure: The author is long WFC, HSBC, DB. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.