Citigroup Inc (C): Big Banks Could Mean Big Gains

Alternatives: Bank of America and Wells Fargo (safer and safest)

One step up from Citigroup Inc (NYSE:C) in terms of risk and asset quality is Bank of America Corp (NYSE:BAC), the second largest bank holding company based in the U.S. While Bank of America was indeed hit hard by the financial crisis, shareholders were not diluted nearly as much, and the company actually made some savvy moves during the worst times, acquiring Countrywide and Merrill Lynch. While Bank of America Corp (NYSE:BAC) is by no means the safest pick in the sector, I do rank it slightly above Citigroup. Bank of America Corp (NYSE:BAC) trades for 14 times this year’s earnings, which are projected to grow to $1.54 over the next two years.

Wells Fargo & Co (NYSE:WFC) is one of the strongest of the big banks, and is the only one of the three that turned a profit every year during the crisis. In fact, Wells Fargo & Co (NYSE:WFC) also made a very big acquisition, scooping up Wachovia for pennies on the dollar. Due to its strong financial state, Wells Fargo is the only one of the three allowed to pay a significant dividend, currently yielding 3% annually. Wells Fargo trades at a very reasonable 10.9 times 2013’s earnings, but with lowered risk comes lower growth potential. Wells Fargo & Co (NYSE:WFC) is projected to grow its earnings at an 8% annual rate going forward, well below the expectations for the other two.

What to do?

The big bank stock that is right for you depends on your particular level of risk tolerance. I personally believe that the recovery will be sustained for several years and that interest rates will begin to rise fairly rapidly once the Fed’s target of 6.5% unemployment is reached. This should benefit these banks tremendously, and if for some reason we fall back into recession, rest assured that these banks are much more able to withstand hard times than they were just a few years ago.

The article Big Banks Could Mean Big Gains originally appeared on Fool.com and is written by Matthew Frankel.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup Inc (NYSE:C) , and Wells Fargo. Matthew is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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