In February, the nation’s five largest mortgage banks, Bank of America Corp (NYSE:BAC), Ally Financial (NASDAQOTH:ALFI), JPMorgan Chase & Co. (NYSE:JPM), Wells Fargo & Co (NYSE:WFC) and Citigroup Inc (NYSE:C), agreed to a $25 billion settlement with the federal government (and 49 state attorney generals) on account of mortgage servicing abuses. Part of the settlement included the mandating of new servicing standards and an independent compliance monitor to enforce the remedy. With this settlement now in place, investors are wondering if they should start looking at banks once again for long-term gains.
Are brighter days ahead for the nation’s largest banks? Should investors buy in? In this article, we’ll look at stock price movement, earnings, and dividend yields to see if these banks can present any good opportunities for investors.
Will JPMorgan’s profits double?
Noted analyst Dick Bove sees JPMorgan Chase & Co. (NYSE:JPM)’s profits rising over the next few years to over $40 billion. Yet, based on about $2.4 trillion in assets, that level of earnings would be tough to hit. To record the level of profits Bove predicts, JPMorgan Chase & Co. (NYSE:JPM) would have to grow its assets to more than $3.4 trillion. Now it might get there eventually, but the bulk of the company’s growth has come from acquisitions like Washington Mutual and Bank One, as opposed to internal organic growth.
As this continent’s largest bank, JPMorgan Chase & Co. (NYSE:JPM) will find itself in one court or another pretty much all the time. For instance, there are allegations that the bank continues to engage in illegal debt collection practices. Fortunately, these are more costs of doing business than genuine risks.
Despite the stock increasing by 60% over the past year, it’s still selling at a price to earnings ratio of under 10. It also has a 2.8% dividend yield and its earnings per share will be helped by continuing stock buyback plans. This should be a solid performing bank for many years.
Can Wells Fargo continue to profit?
Wells Fargo & Co (NYSE:WFC) has had its profitability tied more or less to its mortgage banking unit over the past eighteen months. In 2012, the big bank had a nearly 29% share of the nation’s mortgages, more than the next five mortgage banks combined. Last year, the bulk of its $524 billion in mortgage volume was due to homeowners taking advantage of the low interest rate environment. Essentially, the low hanging fruit has already been picked.
Wells Fargo & Co (NYSE:WFC) had an excellent first quarter of 2013, but its mortgage volume of $109 billion was down 16% year over year. Further, it may not even do $400 billion this year. First quarter results were largely driven by expense cuts and not the addition of new business. Even though revenue was down $300 million year over year, it shouldn’t have trouble diversifying its revenue streams over the long term.
Ally Financial – headed toward normalcy
Ally Financial (NASDAQOTH:ALFI), formerly known as “GMAC,” perhaps the slowest of the nation’s large banks to recover from last decade’s recession, resolved its largest unknown earlier this month. Its $2.1 billion deal with its former mortgage unit, Residential Capital and its creditors will allow Residential Capital to emerge from bankruptcy, and remove a big contingency from Ally Financial (NASDAQOTH:ALFI). Now the bank can pursue its plans to become a retail force. On the heels of that settlement, rating services have stabilized the previously negative view of Ally Financial (NASDAQOTH:ALFI)’s bond rating.
The balance of the year will not be about Ally Financial (NASDAQOTH:ALFI) making money. It will be about further establishing its retail presence so that it can fully participate in what should be an excellent lending climate. And that’s because interest rates should rise and interest rate spreads will widen. For the risk taker, Ally Financial (NASDAQOTH:ALFI) has some serious long term potential.
Citigroup recovery continues
Citigroup Inc (NYSE:C) recently resolved a significant lawsuit related to mortgage bonds without disclosing the amount of the settlement. On the same day, the bank settled a several hundred million dollar claim by Allstate Insurance. One by one, Citigroup Inc (NYSE:C) is putting to rest all the problems it either caused, or inherited, last decade.
Citigroup Inc (NYSE:C)’s stock is up more than 20% over the past year and is still selling within a few cents of tangible book value. In fact, Citigroup has a trailing 12 month return on assets of just 0.46%. Because Citigroup Inc (NYSE:C) has been able to clean up its act, earnings could be up by double digits on average over the next several years. Of the nation’s top tier banks, Citigroup Inc (NYSE:C) is a solid bet.
Conclusion
The banking industry earned a record $40.3 billion in profits in the first quarter, buoyed by expense reductions and lower provisions for loan losses. And because big banks are adjusting their lending practices, these earnings improvements seem to be stable and should accelerate. Any of these banks are suitable for the long term investor
Bill Edson has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Citigroup Inc (NYSE:C) , JPMorgan Chase & Co (NYSE:JPM)., and Wells Fargo. Bill is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article 4 Banks For The Long-Term originally appeared on Fool.com is written by Bill Edson.
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