The Big Bank Earnings Round-Up
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The beginning of earnings season has brought with it the results of four of the largest banks in the country - JPMorgan (NYSE: JPM), Wells Fargo (NYSE: WFC), Citigroup (NYSE: C) and Bank of America (NYSE: BAC). All of these banks showed strong growth in the quarter, with all four beating analyst expectations handily. But which of these banks offers the best value for investors?
Strong results, some worries
JPMorgan, led by CEO Jamie Dimon, posted a 32% increase in net income in the second quarter. The bank earned $6.5 billion, up from $5 billion during the same period last year. On a per-share basis earnings were $1.60, soundly beating the consensus estimate of just $1.44. Dimon had this to say:
Our earnings reflected strong performance across our businesses. We continue to see broad-based signs that the U.S. economy is improving and we are hopeful that, as jobs are added and confidence builds, the U.S. economy will strengthen over time.
While consumer deposits and credit card sales volume were up 10% year-over-year loan growth grew more slowly. Business banking loan volume was up just 4% while net income from mortgage banking was down 14% as higher interest rates cut the number of loan applications.
Wells Fargo, Warren Buffett's favorite bank, posted strong results as well. Second quarter profit rose by 19% to $5.52 billion, up from $4.62 billion one year ago. EPS of $0.98 beat the consensus analyst estimate of $0.93 handily.
Much like JPMorgan, Wells Fargo suffered from a weakened mortgage business, bad news given that Wells Fargo is the largest mortgage lender in the nation. Mortgage banking income declined by 3% year-over-year while the number of mortgage applications sank by 30%.
Citigroup, not to be outdone, reported that its second quarter profit surged by 42% year-over year. The bank earned $4.18 billion, or $1.34 per share. Adjusting for a one-time gain this was reduced to $1.25 per share, beating the consensus estimate of $1.17 per share by about 7%.
Citigroup has far less exposure to the mortgage market than other big banks, instead focusing heavily on international markets. Europe, the Middle East, and Africa saw huge jumps in earnings, while Asia and Latin America saw more modest growth. A slowing down of these fast-growing markets is the biggest risk for Citi, much like the mortgage business is the biggest risk for JPMorgan and Wells Fargo.
Bank of America destroyed analyst estimates, with earnings rising 63% to $4 billion. EPS of $0.32 beat the consensus estimate by a staggering 28%, while revenue grew by about 3%. Shares of Bank of America reached new 52-week highs on the news.
Strong performance in equity sales and trading, along with lower expenses, drove Bank of America's earnings beat. CEO Brian T. Moynihan had this to say:
We are doing more business with our customers and clients, and gaining momentum across every customer group we serve. We must keep improving, but with the consumer recovering and businesses strong, we have lots of opportunity ahead.
Much like JP Morgan and Wells Fargo the mortgage business struggled. Since much of the jump in profit was due to Wall Street related businesses it's unclear if this profit level is sustainable, especially with a weakening mortgage business.
Ranking the banks
Many people simply look at the book value of a bank to determine if the stock is inexpensive. But Warren Buffett says that the key to valuing a bank is to look at the earnings, specifically the return on assets. A bank that achieves a higher return on assets should demand a higher P/B ratio, and vice versa.
Let's use the most recent quarter's earnings and the average book value during the quarter to see how these four banks are being valued by the market.
In this graph I've annualized the return on assets for the quarter. Wells Fargo achieves the higher ROA and, therefore, trades at the higher P/B. Both JPMorgan and Citigroup fall into a line with Wells Fargo, with the ROA roughly equal to the P/B. But Bank of America breaks that trend. With an ROA around 1% and trading below 0.8 times the book value, Bank of America looks like the best value. Now, the fuzziness of the true value of assets on these banks' balance sheets lowers the value of this comparison, but if the numbers are taken at face value then Bank of America is cheaper relative to the other big banks.
The dividend picture
If you're a dividend investor then both Bank of America and Citigroup, which pay token dividends at best, are not even in consideration. On the dividend front both Wells Fargo and JPMorgan pay solid dividends. Wells Fargo pays a 2.76% dividend after raising the payout two quarters in a row. JPMorgan pays a very similar dividend yielding 2.75%, and it increased its dividend payment earlier this month by 27%. Both Wells Fargo and JPMorgan are part of The Ultimate Dividend Growth Portfolio.
The bottom line
The big banks with the highest return on assets, Wells Fargo and JPMorgan, appear fairly valued and pay solid dividends. Citigroup pays a token dividend, and there's not much reason to buy the stock over Wells Fargo or JPMorgan. But Bank of America may offer some value at its current market price, as the stock trades at less than 0.8 times the book value but has increased its annualized return on assets to about 1%. The stock reached new 52-week highs on the news of its results, but it could go higher based on its relative value.
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Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Bank of America and 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!