3 Undervalued Money Center Banks Offering an Opportunity for Growth
Adnan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
This article is aimed at screening out three US money center banks which are trading below their intrinsic values and can provide investors with an upside. For this purpose, discount to book value is used as the primary criterion to determine whether the bank under consideration is undervalued or otherwise. The screening results show Citigroup (NYSE: C), JPMorgan (NYSE: JPM) and PNC (NYSE: PNC) to have satisfied the aforementioned criteria. Investors can expect an upside of 14.5%, 8.5% and 8% from Citigroup, JPM and PNC, respectively. The remaining of the investment thesis will touch upon each of the banking companies briefly.
The specific criteria are as follows:
- Each banking company must possess an average daily trading volume of over 500,000.
- Each banking company must trade at least 5% below its book value.
- For each of the banking companies under consideration, analysts must have a consensus mean buy recommendation.
Formed in 1998, Citigroup history dates back to the founding of Citibank in 1812. The bank has a vast global footprint, serving over 160 countries. This vast global presence, particularly in the emerging markets has become a primarily source of the bank’s future growth. The bank’s fourth quarter results remained shy of expectations on litigation expense and lower trading profits. Citigroup’s asset quality remained largely stable to improving during the quarter. The loan-to-deposit ratio remained at 58%, giving Citigroup enough margin and liquidity to expand its lending in the coming quarters. In addition, this banking giant has an opportunity to generate additional revenues from the freed up cash due to the new relaxed Basel conditions, as noted in a previous article.
Citigroup has an average trading volume of 23 million shares per day, which provides investors with enough liquidity. With regards to its book value, the stock is currently trading at 31% discount. Analysts covering the stock have a consensus outperform recommendation for Citigroup. This means, generally most of the analysts support my thesis that Citigroup will outperform most of its peers and provide better upside. Only 2 analysts recommend their investors sell Citigroup.
The largest bank by assets, JPMorgan reported its recent quarter’s results that were better than expected on strong performance in the Corporate and Investment Banking divisions. During the quarter, asset quality improved as non-performing assets declined 6% versus the linked quarter, while charge-offs declined 41% over the same time period. However, the liquidity position, represented by loan-to-deposit ratio deteriorated as the ratio increased from 158% to 168%
JPMorgan is trading at 5% discount to its book value, which is $51.27. Analysts covering the stock have a consensus outperform recommendation for JPMorgan, with 34.3% of them recommending their investors buy the stock, while 48.6% rate the stock outperform. None of the analysts recommend their investors sell this bank. JPMorgan has an average daily trading volume of 20 million shares a day, with regards to its forward earnings, the bank is trading at 8.2 times, which is also very cheap. Therefore, this bank is an excellent investment opportunity.
PNC Financial Services
PNC Financial is considered to be one of the largest commercial real estate lenders in the US and the availability of cheap funds tops the wish list of commercial real estate sector.
Among other highlights of the recent quarter’s performance, the bank reported improved fee income and stronger than expected net interest income. Asset quality, as represented by net charge-offs came in at 0.67% of average loans, compared with 0.73% in the prior quarter, while net interest margin grew 3 basis points to 3.85% sequentially and has continued to hover around this range over the past 5 years.
Over the past three years, PNC has experienced growth in the number of customers in all four business segments. Its residential mortgage loans segment originations reached $15.2 billion, up 33% from a year ago and core net income for 2012 increased 12%. Going forward, the bank is expected to benefit from lower funding costs, organic growth and Southeast expansion.
With a daily average trading volume of 2.4 million shares and a book value per share of $67.05 at the end of the fourth quarter of 2012, PNC Financial is trading at 7% discount to its book value. The bank reported 9% increase in its fourth quarter book value compared to the prior year end. Analysts covering the stock have a consensus outperform recommendation for PNC Financial. Only 2 analysts rate PNC Financial underperform. I have a year-end target price of $68 for PNC, which represents an upside of 8%.
I believe the above short-listed stocks are the best way to play the US money center banks. These banks provide the required liquidity as represented by their daily trading volumes, while their attractive valuations provide investors with upside potential, which is also supported by consensus recommendation.
equityfinancials has no position in any stocks mentioned. The Motley Fool owns shares of Citigroup Inc , JPMorgan Chase & Co., and PNC Financial Services. 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!