Money in the Bank for These Bank Stocks
Nihar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I guess if you hate puns I have already scared you away. With all the news and noise since the credit crisis of 2008, people might no longer be aware of exactly what banks do or how they function as a business. At the very core of it banks redeploy accumulated and deposited capital in order to generate profit. The returns on the deployed capital have to be enough to reward depositors, pay overhead, expand, and pay dividends. Redeploy is just another word for giving out loans of various kinds. Now banks invest in securities and other things, but this is a broad simplification.
Net income is the bottom line. It is profit. For banks, it is fodder to issue more loans and grow profits. Those profits will increase in absolute terms even if they stay flat as a percentage of total assets. Net income for a bank is fantastic. It is money they have. They do not have to pay the owners of the money interest as a reward for depositing. It is money they can use to acquire assets of various sorts. Obviously a bank is vastly more complex than the bottom line, but it is a good place to start in judging a bank. Net income that does not grow might not be the best investment long term, and slow growth might still leave your portfolio behind the broader market.
I will go over 4 banks and what their net income for the trailing twelve months tells me, though I may look at other factors to determine what I would invest in. The banks are Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), Citigroup (NYSE: C), and JPMorgan Chase (NYSE: JPM). All numbers are June 2012 off ycharts unless otherwise stated. Here is a chart of all the net income TTMs for the last 5 years:
Bank of America – Net Income TTM: $9.911 billion
Bank of America is my favorite bank stock just because I feel it is massively undervalued, which I have mentioned before. Its trailing net income has finally become positive. This reflects improvements in profitability. This is why I like trailing over just using the net income of every quarter. I want a trend not an aberration. Foregoing the rare times that even the smoothing of the trailing fails to provide a clear picture trailing metrics strike me as better.
Bank of America is a company on the mend. I think it is not fairly valued, and with it being profitable it will just become more undervalued. Imagine Bank of America as spring-loaded. You might get whiplash when it finally does take off. Considering that just a quarter ago net income was negative. I think profits must have recovered extremely well. This is not just sputtering along in the black. It crossed into the black and continued running. Revenue growth has flipped to positive, and I will be looking for them to keep positive revenue growth even if it cools a bit, but more on that below.
I am sure that Bank of America will not take the cash they stockpile and buy another Countrywide. Hopefully, they have learned their lesson. For the near future, I would prefer them to focus on organic growth and shoring up their balance sheet against large write-offs that could stem from Europe. Bank of America will take some time to reach its true potential, but it is a great time to get in. Though recently its been rising at a steady clip. It might be time to take a position soon. Perhaps I will in the next two weeks.
Bank of America is one I expect to move a bit faster. After it moves it might transform into something that you hold long term like 5 to 10 years, but for now that is not what I am looking for on Bank of America. For a stock that we can buy and hold we turn to Wells Fargo.
Wells Fargo – Net Income TTM: $16.15 billion
Wells Fargo is probably my second favorite on the list. As far as I know from following bank news the last few years Wells Fargo is one of the few national banks left that does traditional bank related stuff. I'm sure they have other operations, but I have not yet seen trading related mishaps with Wells Fargo. This is true of a few other banks, but Wells Fargo just seems to be the most consummate.
Notice that Wells Fargo has been increasing net income at a steady rate. It has a nice slope going into the future. Seems to be nice for a buy and hold strategy. Perhaps I am reading too much into it, but it signals to me that Wells Fargo is working at an even pace. They are not taking crazy bets or trying some foolishness to impress shareholders. Most banks have learned this lesson, but Wells Fargo did it without too much a thrashing. That is why I feel comfortable if I was to park my money with Wells Fargo. They have built this level of trust by not being foolish. It may be a low standard, but after the credit crisis, it is all we have. Their revenue growth has been slightly positive and stable, but more on that below.
If I had to choose a bank stock I would go with Bank of America, but Wells Fargo is better if you want lower risk. At least in my opinion. Wells Fargo has been profitable, whereas Bank of America just regained profitability. I like both stocks though. Let me move to bank stocks I am less favorable toward.
Citigroup – Net Income TTM: $10.60 billion
Net income seems to have flat-lined on Citigroup. It is still positive and that is a good thing. It took me some time to figure out why Citigroup was not one of my favorites. There is that fantastic drop in 2008 where net income was about -$20 billion. However, there is no reason to be wedded to the past. Citigroup did a good job of digging itself out of that hole, and one could make the argument that it is undervalued relative to its current position due to its historical baggage. I am just not sure how high till will rise compared to the others. However, we do have quantitative easing again so perhaps the sky is the limit at least if there is an initial rally due to money flooding the stock market.
One flag for me is that revenue growth has a negative percentage. With net income not dropping I am not sure if this is a pervasive issue so maybe it is a beige flag, or at most a slightly yellow flag. Revenue growth has been negative for the past few quarters, though Bank of America just moved to positive revenue growth and Wells Fargo has low single digit growth. Perhaps I am making a mountain out of a revenue hill, though I think it is the reverse of that. Just think about that sentence for a second. The point is I feel more confident about Bank of America as an undervalued bank, and Wells Fargo as a strong bank stock to own on a longer timescale.
JPMorgan Chase – Net Income TTM: $16.58B
The highest net income of the group. A slight downward slope recently, but nothing too serious. I do not like JPMorgan Chase because of their whole trading issue. I know it is not that big of a deal, and with net income being the highest of the four they can absorb those losses. However, considering it was pretty recent that the CEO had to talk to Congress I would rather just hold off. It does not matter to me that he gave them a trouncing. I do not like the notoriety right now. I might revisit JPMorgan Chase later. With the net income dipping, I can hope that better entries lie ahead. In the mean time there are other banks I could invest in. There is no reason to buy every bank stock. Even if you got two great investments if you have to choose one then there has to be a second place, or in this case a fourth. The reason it ranks last is because I think it is fairly valued which puts it below Bank of America and Citigroup for me. As far as a long term strategy, I like Wells Fargo later because it seems to be more conservative in its risk taking.
JPMorgan Chase has the largest decline in revenue growth at -17.80%. The quarter before was a bit over 1% and the quarter before that one was below -17% again. Bank of America could potentially oscillate like that, but JPMorgan Chase already has. There is just too many good signs for other bank stocks to go with JPMorgan Chase in my book. Sure they might rise with the infinite quantitative easing, but that should benefit all banks. Besides, quantitative easing might not be as positive for banks in the long run. I want to pick the one where I can get the most bang for my buck.
Bank of America is my favorite, because I expect it to have potentially the best growth. I suppose it is the riskier play so if you want your feet on extra strength terra firma you might consider Wells Fargo instead. No reason you cannot go with both if you want, it simply depends. Citigroup and JPMorgan are less favorable in my opinion. Citigroup might have some legs, but I am just not sure at this point. I will take a deeper look into the company, and I might change my mind. For now, I would not enter into Citigroup. JPMorgan, I feel, was the stock to own in the past, and now you have your reward. At this point I would wait and see if you do not see a fantastic entry. Perhaps if Europe melts down we would get some fantastic entries. For now I will stick with my two favorites, and maybe Citigroup if I uncover something akin to gold.
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TheArchivist has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Citigroup Inc , JPMorgan Chase & Co., and Wells Fargo & Company and has the following options: short OCT 2012 $33.00 puts on Wells Fargo & Company and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. 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.If you have questions about this post or the Fool’s blog network, click here for information.