Although the American banking sector is now healthier than at any point during the past half-decade, it remains hamstrung by a number of secular issues. In particular, the country’s largest retail and commercial banks have yet to shake the stigma of the “bailout era.” Many investors are skeptical that major institutions like Bank of America Corp (NYSE:BAC) and Citigroup Inc. (NYSE:C) are as healthy as they claim to be. Five years after the onset of the financial crisis, many market-watchers believe that these banks still teeter on the brink of insolvency.
While these suspicions are almost certainly misguided, it is incontrovertible that some banks are healthier than others. Whereas Bank of America Corp (NYSE:BAC) and Citigroup have yet to recover in full from the ravages of the recent recession, another major American bank appears to be powering ahead of its once-larger rivals. In fact, Wells Fargo & Co (NYSE:WFC) has attracted the attention of Warren Buffett’s holding company Berkshire Hathaway Inc. (NYSE:BRK.A) once again and looks poised to deliver growth for years to come. While owning large-cap bank stocks is not every investor’s cup of tea, those who wish to make tentative inroads into the space would do well to make a side-by-side comparison of WFC, Bank of America Corp (NYSE:BAC) and Citigroup Inc. (NYSE:C).
About Wells Fargo, Bank of America and Citigroup
San Francisco-based Wells Fargo is a diversified bank that serves retail and business customers in around three dozen countries. In addition to a full suite of deposit account and wealth management services, the company offers home loans, refinancing vehicles and credit services to American consumers. In particular, its mortgage refinancing operations have driven its profits in recent years. Wells Fargo & Co (NYSE:WFC) employs around 270,000 people and earned about $18 billion on $79.5 billion in gross 2012 revenues.
New York-based Citigroup offers many of the same products and services as Wells Fargo. The company is particularly well-known for its credit card services and formerly operated a lucrative investment banking arm. These days, the company is more consumer-focused and offers lending, advisory and support services in 40 countries. Citigroup Inc. (NYSE:C) employs about 260,000 people and earned $7.5 billion on $59.3 billion in gross 2012 revenues.
Charlotte-based Bank of America provides wealth management, deposit account and credit card services for American consumers and business owners. In addition, it provides commercial and mortgage loans to customers in North America and elsewhere. Although its international operations are more limited than those of its competitors, it does maintain a presence in certain overseas markets. Bank of America Corp (NYSE:BAC) employs 267,000 people and earned $2.8 billion on $75.2 billion in gross 2012 revenues.
What Makes WFC Different
Simply put, Wells Fargo & Co (NYSE:WFC) is no longer consigned to playing catch-up with Bank of America Corp (NYSE:BAC) and Citigroup Inc. (NYSE:C). With once-proud rivals like Wachovia out of the picture, the company finds itself in an enviable strategic position. What’s more, its market capitalization of more than $200 billion makes it one of the largest retail financial institutions in the United States. By comparison, Citigroup and Bank of America enjoy market caps of less than $150 billion.
Relative to its two rivals, Wells Fargo & Co (NYSE:WFC) also has better fundamentals and a superior balance sheet. The company’s $1 annual dividend provides investors with a yield of about 2.6 percent. For comparison, Citigroup Inc. (NYSE:C) sports a laughable yield of .1 percent. With its lower share price, Bank of America’s identical $0.04 dividend is good for a yield of roughly .3 percent. Bank of America Corp (NYSE:BAC) also has an out-of-control debt load of more than $645 billion to balance its cash hoard of around $525 billion. Although Citigroup has more cash than debt, its $557 billion debt load is still too large for comfort. Wells Fargo’s $184 billion debt burden looks positively responsible by comparison.
Buffett’s Stake
Buffett’s recent announcement that Berkshire had increased the value of its stake in Wells Fargo to more than 8 percent of the company shocked even the most bullish Buffett-watchers. Since 2010, Wells Fargo & Co (NYSE:WFC) has been one of a handful of companies that Buffett has touted and is commonly cited as one of Berkshire’s “big four” investments. At Wells Fargo’s current valuation, Buffett’s stake is worth more than $16 billion.
Long-Term Company and Industry Outlook
The news that Citigroup has been ordered to pay out another $730 million to bondholders who lost significant amounts of money during the financial crisis serves as a reminder that major banks’ woes have not yet subsided. However, Wells Fargo looks to be in far better shape than either Bank of America Corp (NYSE:BAC) or Citigroup Inc. (NYSE:C). At this point, it seems likely that the company will continue to consolidate its competitive advantage and enjoy healthy growth during the coming quarters.
For value investors, the choice is clear: Wells Fargo & Co (NYSE:WFC)’s superior fundamentals and strong finances make it an attractive pick relative to its rivals. It does not hurt that the company’s stock has gained more than 50 percent during the past 18 months. With all of these tailwinds, Wells Fargo offers a tantalizing opportunity for investors looking to get back into large-cap banks after a long hiatus.
The article The Bank On Top Of The Pack originally appeared on Fool.com and is written by Mike Thiessen.
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