When looking over how some of the top banks trade, one big thing that stood out to me was the relative cheapness of Morgan Stanley (NYSE:MS). It’s been well talked about how cheap Citigroup Inc. (NYSE:C) and Bank of America Corp (NYSE:BAC) are, but shouldn’t Morgan Stanley get some recognition?
Morgan trades with a price-to-book ratio of only about 0.7, while Citi is at 0.7 and Bank of America Corp (NYSE:BAC) at approximately 0.6. Meanwhile, other top investment banks, including Goldman Sachs Group, Inc. (NYSE:GS) and UBS AG (USA) (NYSE:UBS), trade at 0.9 and about 1.2, respectively.
However, after digging a bit deeper, Morgan Stanley’s sub-par valuation may actually be warranted. And it turns out that perhaps Citi and Bank of America Corp (NYSE:BAC) are the ones that are undervalued. With the turmoil over the last five years, Citi is down 81% and Bank of America down 68% over that time period.
Let’s dig a bit deeper
Not only do I not think Morgan Stanley (NYSE:MS) is cheap, but I think Citigroup Inc. (NYSE:C) offers investors an impressive investment opportunity. From a returns standpoint, Citi appears to be head and shoulders above Morgan Stanley.
| Morgan Stanley | Citi | Goldman Sachs | Bank of America | |
| Return on investment | 0.3% | 1.2% | 1.4% | 0.6% |
| Return on equity | 1.8% | 4.6% | 10.7% | 2.1% |
| Return on assets | 0.1% | 0.5% | 0.8% | 0.2% |
Citigroup Inc. (NYSE:C) also happens to have a solid balance sheet, with a debt-to-capital ratio of 55%, compared to Morgan Stanley (70%), Goldman (68%), UBS (84%) and Bank of America (70%).
Over the last few quarters, Morgan Stanley has been taking initiatives to restructure its operations in order to lower balance-sheet risk and focus on less capital-intense businesses, such as global wealth management. However, the firm still struggles with generating meaningful results for shareholders. Part of the issue is its elevated cost structure.
Operating expenses for 2012 only decreased 2% from 2011. As part of the variant view, Morgan was up more than 5% in recent sessions thanks to an upgrade by SunTrust. The bank moved its rating on Morgan from a “neutral” to a “buy” with a $25 price target, which suggest upside of around 15%.
Banking’s best
Citi cleared the 2013 stress test and also managed to outperform other major banks. Its latest capital plan got the company approved for $1.2 billion worth of share repurchases through the first quarter of 2014. What’s also encouraging is Citi’s diverse business model with a significant portion of the revenue being generated from outside the U.S., operating in over 160 countries.
The company’s long-term goal is to continue shrinking non-core assets and increase its fee-based business. The winding down of Citi Holdings (legacy problem assets) continues to run a positive course, with Citi Holdings’ assets decreasing 31% from the prior-year last quarter and making up only 8% of the bank’s total asset at the end of 2012.
The investment banks
Other notable banks include Goldman Sachs Group, Inc. (NYSE:GS) and UBS. Goldman’s main segment (53% of revenue) consists of its institutional client services, which includes client execution activities related to making markets in credit products, interest rate products, mortgages, currencies and commodities.
