JPMorgan Chase & Co. (NYSE:JPM), Ally Financal Inc (NYSE:GMA), Citigroup Inc (NYSE:C), and M&T Bank Corporation (NYSE:MTB) are among the nation’s top banks that have survived recessions of the past and pledge to protect their customers through good and the bad. While these banks have a history as America’s banks, it is unclear whether they have futures as bright as their pasts. Should you keep your accounts active with the bank heavy-hitters, or should you invest in profitable banks that aren’t as glamorized by history?
JPMorgan Chase & Co. (NYSE:JPM) is the largest commercial bank in America, and among the largest in the world, with assets of nearly $2.4 trillion. Not many years ago, it was also thought of as America’s smartest bank, somehow rising above the banking carnage that littered the banking landscape late last decade. But, in the last 12 months, JPMorgan Chase & Co. (NYSE:JPM) has more than made up for lost time in the “bad news” department.
In addition to the massive, $6 billion trading loss known as the “London Whale,” JPMorgan Chase & Co. (NYSE:JPM) has been the subject of numerous money laundering claims, additional lawsuits for mortgage fraud, and substantial executive turnover, all of which goes not toward whether JPMorgan Chase & Co. (NYSE:JPM) can earn money, but rather, that it has the same sorts of internal challenges that affect all large money center banks.
In its first quarter, JPMorgan Chase & Co. (NYSE:JPM) reported earnings of $6.5 billion, or $1.59 per share, a record first quarter for the company, compared to $4.9 billion in the first quarter of 2012. But, it’s not quite what it seems. While profits were a plum $0.20 per share above analysts’ expectations, they were enhanced by reserve provision reversals of $1.15 billion from the year earlier, and lowered reserve provisions of another $110 million from the first quarter of 2012. With reserve manipulations accounting for nearly a quarter of the bank’s profit, the underlying business is still suffering from the same sluggish loan growth affecting all banks. JPMorgan has enough excess reserves to carry through similar profit numbers for a couple more quarters, but perhaps it would be better off building capitalization. In this year’s Federal Reserve Stress Test, under the adverse hypothetical scenario, JPMorgan fared nearly the worst among the 15 banks tested. Helping to depress that common capitalization down to 5.3% is that JPMorgan was allowed a $6 billion share buyback program, and a 27% dividend hike up to a quarterly $0.38 per share. These capital returns were awarded with the caveat that JPMorgan would clarify certain elements of its capitalization by the third quarter of this year.
In part due to an improving economy, and in part due to JPMorgan’s still generous reserve balance, I look for 2013 earnings of about $5.70 per share, an advance of 9% from 2012. Going further, I see JPMorgan as a high single-digit annual earnings gainer. The company’s 3.1% dividend yield is attractive, but other banks do offer better growth potential.
Residential Capital could crush Ally
Ally Financal Inc (NYSE:GMA) is still among the nation’s largest banks, with about $166 billion in assets at the close of the first quarter of this year. Exposure to sophisticated financial instruments and a leadership position in subprime mortgages, along with cash woes at former parent, General Motors Company (NYSE:GM), eventually led to JPMorgan Chase & Co. (NYSE:JPM), Ally Financal Inc (NYSE:GMA), Citigroup Inc (NYSE:C), and M&T Bank Corporation (NYSE:MTB) spinning off GMAC in 2006. Eventually, the newly independent GMAC changed its name to Ally Financal Inc (NYSE:GMA), which spun off its mortgage unit, Residential Capital, which filed for bankruptcy protection under the crushing weight of all that mortgage debt. The Federal Treasury still owns 74% of Ally Financal Inc (NYSE:GMA), so the bank now has two big issues: first, not being dragged further down by the legacy mortgages of Residential Capital, and second, paying back the $17.2 billion it still owes the Treasury.
Ally Financal Inc (NYSE:GMA)’s recent quarters have been dominated by one-time events, as the bank sheds assets in its quest to be a domestic retail bank and servicer to retail automotive markets. The sales, principally of foreign assets, in the first quarter of this year led to earnings of $1.1 billion (Ally Financal Inc (NYSE:GMA) does not break down per-share amounts). The earnings were more than triple the $310 million posted in the first quarter of 2012. Take out the numerous one-time items, and Ally actually posted a narrow loss on a pretax basis of $6 million.
The biggest problem of investing in Ally is not just figuring out a fair per-share valuation, but rather, the impact Residential Capital may yet have. While Ally is prepared to pay up to $750 million toward the matter, a bankruptcy judge recently mentioned that, in fact, Ally might be liable for up to $25 billion of Residential Capital’s liabilities, a crushing amount to Ally. I would, therefore, steer clear of this issue and watch the bankruptcy of the former mortgage unit with some care.
A top choice
Citigroup Inc (NYSE:C) is continuing its strong comeback from the abyss of last decade. In the first quarter of this year, earnings came to $3.8 billion, or $1.23 per share. Were it not for a negative credit valuation, earnings would have been $4 billion, or $1.29 per share. In last year’s first quarter, Citigroup Inc (NYSE:C) earned $2.9 billion, or $0.95 per share. The company’s loan portfolio grew by 5% over the past year to $539 billion, and the company’s net interest margin even spread over the past year to 2.93%.
Like all money center banks, Citigroup Inc (NYSE:C) has found it had over-reserved for loan losses, and continues releasing reserves virtually every quarter. In the first quarter, the release was $652 million, far less than the $1.2 billion in the first quarter of 2012.
More than most banks, Citigroup Inc (NYSE:C) makes a compelling value story. Despite its rise of 47% in the past year, the company is still selling for under its tangible book value. On a fundamental basis, Citigroup Inc (NYSE:C)’s earnings will continue to improve by close to 20% per year, I believe, out to mid-decade. The five-year PEG is probably overstated at 0.74. Citigroup is my top choice among the country’s trillion dollar banks, and among my top picks for banks of any size.
Where is the upside?
M&T Bank Corporation (NYSE:MTB) had been a top pick in the financial sector, and has risen in price nearly 18% in the past year. But of late, there have been some headwinds. I had expected a fairly seamless and quick integration of M&T Bank Corporation (NYSE:MTB) with Hudson City Bancorp, Inc. (NASDAQ:HCBK), yet the proposed merger now will not close any earlier than the first quarter of 2014. The merger will constitute a virtual windfall for M&T Bank Corporation (NYSE:MTB), but on its own, this big Northeast bank is possibly overvalued. In its first quarter, earnings came to $255 million, or $1.98 per share, a whopping 32% over 2013, but just $0.02 per share above expectations.
The mortgage fee income that carried M&T Bank Corporation (NYSE:MTB)’s non-interest income is ebbing, and overall, I expect earnings to stabilize at about $2 per share quarterly for several more quarters, unless or until the merger. M&T Bank Corporation (NYSE:MTB) is a well-run bank, with a stellar efficiency ratio of 55.9%, and a return on assets in the first quarter of 1.36%. There just is not much upside in the face of flattening mortgage income for this institution over the next six to twelve months.
Summary
As a result of a recovering economy, and partially credited to JPMorgan Chase’s current reserve balance, I foresee an increase in JPMorgan Chase’s earnings throughout the upcoming year, as well as high single-digit annual earnings in the long run. Ally Financial faces the contingency of upwards to $25 billion of Residential Capital’s liabilities, which heightens the risk associated with investment. I recommend investing in Citigroup, as it demonstrates consistent growth and continues to sell shares under book value. M&T’s stable history has solidified the bank’s foundation, which has allowed the bank to prosper over the past few quarters. However, I do not foresee significant increases in earnings until the merger with Hudson City Bancorp is complete.
The article Can These 4 Banking Giants Make You Money? originally appeared on Fool.com and is written by Bill Edson.
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