Big US banks have come back strong in recent years. These companies litter the ticker feeds with both overly optimistic bull opinions and cripplingly pessimistic bear opinions. Headlines aside, how are YOU supposed to decide if a big US bank is right for your portfolio? Whether you looking to diversify your portfolio by adding a company from the financial sector or seeking potential income, growth, or speculative positions, the Big Banks present investment opportunities for a wide array of retail investors.
When it comes down to deciding on which of the big 4 US banks, Wells Fargo & Co (NYSE:WFC), JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc. (NYSE:C), and Bank of America Corp (NYSE:BAC), is the company you are looking for it is important to analyze industry specific metrics. I am not saying that you need to throw the basic fundamental valuation factors, such as PE, EPS, and Book Value/per share out the door. I am simply saying that it is very important, especially if you decide to take on speculative position, to understand some key banking industry metrics.
The metrics we will be evaluating each of these four banks on will be loan growth, deposit growth, Loan to Deposit ratio (LTD), and efficiency ratio. Loan growth and deposit growth are important as these two factors influence bank revenue heavily as banks generating revenue by loaning out your deposits. The LTD ratio is crucial as it shows how liquid the bank is. Too high a LTD, the bank may not be liquid enough to meet fund requirements, too low, and the bank may not be maximizing its earning potential. And finally the efficiency ratio, which is the percentage of noninterest expenses in relation to revenue. This ratio demonstrates how “efficient” (GET IT!) a bank is at turning its resources into revenue.
Without further ado, let us dive in see how well these banks perform.
Wells Fargo & Co (NYSE:WFC) seemed to be a bright spot in the “bottomless well” that is big banks. The 150-year-old company currently trades at very attract 11.14 PE multiple with $3.36 (ttm) EPS and a cushy 2.70% dividend yield. In terms of our banking metrics, Wells Fargo & Co (NYSE:WFC) sports an efficiency ratio of 59%, LTD ratio of 82%, and loan and deposit growth at 2.4% and 8.4% respectively. Growth in both deposits and loans generated is a very positive sign as it demonstrates that Wells Fargo & Co (NYSE:WFC) is successful at attracting customers while its 59% efficiency ratio shows it has room for improvement in terms of generating revenue from these customers.
JP Morgan is another company that managed to stay a step above the rest throughout the financial crisis. The company currently trades at a reasonable 9.30 times earnings, with most recent earnings per share of $5.20, and a very nice dividend yield of 2.40%. JP Morgan is essentially “average” when it comes to our banking metrics with an efficiency ratio 67%, a LTD ratio of 61%, loan growth of $10 billion, and deposit growth of $60 billion. The company seems to be very conservative when it comes to generating revenue from its deposit base, which, considering the current financial environment may not be bad thing.
Bank of America Corp (NYSE:BAC) has a much different story than the two banks above. At face value the bank seems way out whack. The company currently trades at 50.28 times trailing twelve-month’s earnings, with measly $0.25 earnings per share, and a dividend yield of 0.30%. As terrible as those fundamentals may look our banking metrics tell a much different story. Bank of America Corp (NYSE:BAC)’s efficiency ratio sits at 85%; its LTD ratio is 82%, with loans decreasing year-over-year by $18 billion and deposits increasing $70 billion year-over-year. You might think that the decrease in loans generated is a dark spot on Bank of America Corp (NYSE:BAC)’s financial resume, however the fact the bank is being more conservative in originating loans and still generating revenue from theses expenses are great signs that point towards long term growth.
Finally, we have another dark sheep of the financial crisis. Citigroup Inc. (NYSE:C)’s story is awfully similar to Bank of America’s except the recent upturn has been even more tremendous. The bank’s fundamental are fortunately not as unappealing as Bank of America Corp (NYSE:BAC)’s. The company currently trades at 18 times earnings, with an EPS of $2.44, and an almost nonexistent dividend yield of 0.10%. Once again the banking metrics tell a slightly different story. Citigroup Inc. (NYSE:C)’s efficiency ratio sits at 72%, LTD ratio is at 70%, with deposits growing 7% year-over year, and loans growing around 1%.
You are probably expecting me to now make a recommendation for one or maybe two of the companies I just described in so much detail and you would be wrong. Because I am not just going to recommend one or tell you to keep a couple on your radar, I am going to recommend you research ALL of them.
The fundamentals of these companies tell two very different stories. One of income and growth, while the other of turnaround and speculation. The most important thing to grasp from all this is the banking metrics show tremendous upside for all four. With conservative efficiency ratio and great deposit and loan growth, and the banks are showing long-term viability. The only question that remains is if you are going to be in for ride or watching from the sideline
The article Best of Breed: Big US Banks originally appeared on Fool.com and is written by Daniel Paterson.
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