Three Reasons To Buy These Banking Giants
Adnan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Stronger economic growth, better liquidity and higher asset quality make Dick Bove bullish on JPMorgan (NYSE: JPM), Bank of America (NYSE: BAC) and Citigroup (NYSE: C). Dick Bove might have changed companies but not his opinion. This noted banking analyst recently joined Rafferty Capital Markets and expects these three banks will rise more than 30% in the next 12 months. Besides predicting strong growth for the entire banking sector of the US, Dick believes significant hike in dividends is on the cards too. The remaining of the investment thesis aims to look into the growth driving factors identified by Dick Bove and whether they are already in action for JPMorgan, Citigroup and Bank of America.
JPMorgan
The largest bank by assets, JPMorgan reported its recent quarter’s results on January 16, 2012. The results were better than expected as the bottom line (EPS) of $1.39 per common share beat estimates of $1.16 per common share. The strength in results was largely due to improved strong performance in the bank’s corporate and investment banking divisions.
Asset quality at JPMorgan improved during the fourth quarter as represented by decline in non-performing assets and charge-offs. The non-performing assets of $11.7 billion declined 6% compared to the linked quarter, while charge-offs declined 41% to $1.6 billion over the same time period.
JPMorgan’s liquidity, represented by its loan-to-deposit ratio, deteriorated. The loan-to-deposit ratio edged up to 168% at the end of the fourth quarter from 158% at the end of the third quarter of the prior year.
Bank of America
Bank of America reported its fourth quarter earnings with an adjusted EPS of $0.21 per common share. The stock fell 3.5% soon after the announcement of the results as the fourth quarter performance did not come out as expected. However, asset quality improved during the recent quarter. The bank reported a 5% sequential decline in non-performing assets during the fourth quarter. Net charge-offs declined to $3.1 billion from $4.05 billion at the end of the linked quarter. Similarly, the bank reported improvement in liquidity. The loan-to-domestic-deposit-ratio was 97% compared to 99% a year ago.
Citigroup
The fourth quarter results for Citigroup remained behind expectations. The reported EPS of $0.69 per common share remained shy of its estimate of $0.96 per common share. Litigation expense and lower trading profits are reported to be the reasons for this poor performance. Citigroup’s asset quality remained largely stable to improving in the fourth quarter 2012. Corporate non-accrual loans decreased 28% to $2.3 billion from the fourth quarter 2011, while consumer non-accrual loans grew 17% to $9.2 billion from the fourth quarter 2011. The estimated loan-to-deposit ratio for the bank at the end of the fourth quarter was 58%. This is much better than Bank of America’s and JPM’s liquidity ratios.
Dick believes Wells Fargo has become too expensive, which is why is recommends investors stay away from it. Despite the fact that WFC is expensive, I believe there are five reasons to buy this banking giant.
Valuations
JPMorgan is trading at 8% discount to its fourth quarter book value, compared to 44% discount for Bank of America and 32% discount for Citigroup. In contrast, Wells Fargo is trading at 27% premium to its recent quarter’s book value.
Conclusion
I believe the drivers identified by Dick are already in play and JPMorgan, Citigroup and Bank of America are poised to benefit from them. Therefore, I recommend investors buy these banking stocks considered in the article.
equityfinancials has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup Inc , JPMorgan Chase & Co., and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!
