Updated on April 9th, 2020 by Josh Arnold
The four money center banks in the U.S. have received a great deal of attention from investors and the media in the years since the Great Recession. The big banks suffered mightily during the worst economic downturn in decades, as one would likely expect.
However, those days have long since passed, and the largest banks are generating profits at rates never seen before. At least, they were before the global impact of COVID-19 began to impact results. Still, we think the current economic storm is temporary and has created buying opportunities in the biggest US banks.
Many big banks have fully recovered and then some, and have returned to paying hefty dividends to shareholders. You can download the full list of all 1,200+ dividend paying financial sector stocks by clicking on the link below.
These companies’ once-strong dividends were reduced to smaller payouts for years because of the Great Recession of 2008-2009, but in the years since resumed their dividend growth. Some have made better progress than others in the financial sector.
However, the past decade has rejuvenated the group in a big way. While the coronavirus crisis threatens the near-term outlook for U.S. banks, we still view the industry favorably for long-term income investors. In this article, we’ll rank them in order of attractiveness on a total return basis, as derived from our Sure Analysis Research Database.
Table Of Contents
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Rankings are compiled based upon the combination of current dividend yield, expected change in valuation as well as forecast earnings-per-share growth to determine which stocks offer the best total return potential for shareholders over the next five years.
Big U.S. Bank #4: JPMorgan Chase & Company (JPM)
JPMorgan Chase traces its lineage back to 1799, making it one of the oldest surviving banks in the U.S. The company has a strong global reach in consumer and community banking, commercial and investment banking, as well as asset and wealth management.
It is the product of more than 1,200 different entities that have merged in the 220 years since its creation and is the largest bank in the U.S. by market capitalization, with annual revenue of about $110 billion and a market capitalization of $276 billion after a huge selloff at the beginning of 2020.
Even after the selloff, JPMorgan is a mega-cap stock, which are stocks with market capitalizations above $200 billion.
JPMorgan competes in every major segment of financial services, including consumer banking, commercial banking, home lending, credit cards, asset management and investment banking.
The bank reported fourth quarter and full-year earnings in January and results showed the strongest year of profitability for any American bank, ever.
Source: Earnings slides, page 4
Earnings were better than expected on the top and bottom lines for the quarter as revenue rose 9% year-over-year to $29.2 billion. Net interest income declined slightly from $14.4 billion to $14.2 billion as JPMorgan pulled back on total loans outstanding, while also seeing the negative impact of lower rates.
Consumer and Community Business saw a 3% gain in revenue year-over-year to $14 billion, helping to offset weakness in Consumer and Business Banking, as well as Home Lending. Those segments saw their revenue decline 2% and 5%, respectively. Asset Management was another bright spot at +8%, while Card and Auto revenue was up 9%. Commercial Banking was off 3%, but Corporate and Investment Banking’s top line soared 31% thanks to strong fixed income revenue.
Noninterest expense rose 4% in Q4 while provisions for credit losses declined 8% on prudent loan underwriting. Dollar earnings rose 21% thanks to the leverage gained from expenses rising less quickly than revenue, and when accounting for the 6% decline in the share count, earnings-per-share soared 30% higher year-over-year, hitting $2.57 in Q4.
Our original estimate for JPMorgan’s 2020 earnings-per-share was $10.90, but the enormous impact of COVID-19 has caused us to revise that number down to $8.30. We do, however, see a swift recovery to normalized earnings moving forward as we think the crisis should largely be a 2020 story.
JPMorgan’s balance sheet remains in excellent shape as its supplementary leverage ratio is still 6.3% and its common equity tier 1 ratio ticked higher to 12.4%, which are both among the highest of the nation’s large banks. The company also distributed $9.5 billion to shareholders in Q4, $6.7 billion of which was share repurchases, and the balance through dividends.
JPMorgan is a strong dividend growth stock, and sports a very high current yield at 4.0%. We see the payout rising at a 6% rate moving forward, so the stock is desirable for both the current yield and payout growth.
The recent selloff has put the stock right at our expected fair value at 11 times earnings, so for the first time in a while, JPMorgan isn’t overvalued. Expected earnings-per-share growth of 8% is expected to contribute positively, leading to expected total annual returns of 11.4% per year through 2025.
While that is a strong total return outlook, it is actually the weakest among the four largest banks. JPMorgan is considered the gold standard in large banking, so its valuation tends to hold up better than its peers, meaning the value proposition tends to be slightly lower but so is the risk when it comes to JPMorgan.
Big U.S. Bank #3: Bank of America (BAC)
Bank of America was founded back in 1904 and since then, has grown into a global banking juggernaut. It has built a strong presence in credit cards, consumer and commercial lending, wealth management, and other financial services. The market capitalization is just under $200 billion today after the recent selloff in the stock.
Bank of America posted fourth quarter and full-year earnings in January and results were once again strong, although growth did slow down from prior years. Revenue was down 1% in Q4 as net interest income declined 3%, which was driven by lower rates, primarily.
Loan and deposit growth helped offset lower lending margins, but the rapidly-evolving yield curve continues to make profitable lending more difficult. Noninterest income was flat year-over-year, helping to keep the damage to total revenue limited when considering the decline in NII.
Noninterest expense was up slightly year-over-year, but Bank of America’s efficiency ratio was 59% in the fourth quarter. The bank has spent the past several years working its costs lower and that has produced solid results in terms of reducing operating costs.
Average loan and lease balances were up 6% in the fourth quarter to nearly a trillion dollars as Bank of America continues to build its Consumer and Commercial loans. Average deposits rose 5% to $1.4 trillion, continuing years of steady growth.
Provisions for credit losses rose 4% in Q4, the product of taking reserves against future losses on new loans. Earnings-per-share came to $0.74 in Q4, up from $0.70 in the year-ago period, which was due essentially entirely to share repurchases, which reduced the float.
Bank of America returned $34 billion to shareholders in 2019, with just over $6 billion in dividends and the balance in share repurchases.
Source: Earnings presentation
The share count has declined enormously in recent years as the company continues to spent billions upon billions of dollars to buy back its own shares. The dividend has grown nicely in its own right as well, rising from just $400 million in 2013 to more than $6 billion last year despite the much lower share count.
We see dividend growth as slowing from here given the very strong growth the company has produced in its payout, but we still think Bank of America is an attractive dividend stock with a payout ratio at just 30%.
We expect Bank of America to return nearly 13% to shareholders annually for the next five years, consisting of 6% expected annual earnings-per-share growth and the attractive 3.3% dividend yield. We also see the stock as undervalued after the recent selloff, trading for just 9 times this year’s earnings estimate of $2.40 – which we’ve reduced from our initial estimate of $3.00 thanks to COVID-19 impacts – against fair value of 11 times earnings.
Bank of America, therefore, offers an attractive yield, an attractive valuation, and what should meaningful earnings growth in the years ahead.
Big U.S. Bank #2: Wells Fargo & Company (WFC)
Wells Fargo was founded in 1852. Today, it provides banking, investments, mortgages, as well as consumer and commercial financing products through more than 7,400 locations in 32 countries.
Wells Fargo has $2 trillion in assets, and produces about $77 billion in annual revenue. Wells Fargo’s market capitalization is down to $118 billion, which makes it the third-largest bank in the U.S by that measure.
The bank reported fourth quarter and full-year earnings in January and results continue to be weak for the struggling banking giant. Net interest income plummeted 11% year-over-year to $11.2 billion, while noninterest income helped offset that somewhat, rising 4% to $8.7 billion. Total revenue, however, declined from $21 billion to $19.9 billion year-over-year.
Wells Fargo continues to struggle with very high expenses as well, a noninterest expense rose $2.3 billion to $15.6 billion year-over-year. This led to lower operating income as revenue declined and expenses rose, crimping profits on both ends. Average loans rose 1% to $957 billion in Q4, while average deposits rose 4% to $1.3 trillion, both of which are quite similar to Bank of America.
Provisions for credit losses were up significantly, adding $123 million to rise to $644 million. However, we note that credit quality remains outstanding for Wells Fargo and that despite the increase, the bank’s loan book is of high quality.
Wells Fargo’s capital position remains strong despite returning nearly $33 billion to shareholders in 2019.
Source: Investor presentation, page 9
Capital returns have been a huge priority for Wells Fargo in terms of reducing the float meaningfully, as well as providing shareholders with an attractive dividend yield. The share count was down 10% year-over-year in Q4 and is down a total of 18% in the past three years.
In addition, the sharp selloff in the stock has the dividend yield up to 7.1%, which is roughly double where it usually sits. Wells Fargo is attractive for income investors due to the high dividend yield.
The valuation has improved as well, even though we’ve cut our earnings-per-share estimate for this year from $4.10 to $3.10 on COVID-19 impacts. That puts the stock at just over 9 times this year’s earnings against our fair value of 11 times earnings. This should provide shareholders with a ~3% tailwind to total annual returns.
Combined with 6% earnings-per-share growth and the 7%+ yield, Wells Fargo looks poised to deliver nearly 15% total annual returns in the coming years. That makes it the second most attractive big US bank.
Big U.S. Bank #1: Citigroup (C)
Citigroup has been in the banking business since 1812, when it was known as the City Bank of New York. This humble beginning eventually gave way to a global powerhouse with interests in credit cards, commercial banking, trading, and a variety of related activities.
It has thousands of branches all over the world and an $87 billion market capitalization today, making it the smallest of the big banks in this article by a wide margin.
Citigroup certainly had the farthest to come in terms of recovering from the 2008 financial crisis. The stock famously fell below $1 briefly during the worst of the recession, but the eventual bailout, years of economic growth, and prudent management have paid off for the company.
Citi reported fourth quarter and full-year earnings in January and results were quite strong, continuing a years-long trend of strong operating results. Strength was broad, with the Institutional Clients Group leading the way with a 10% gain in the top line year-over-year.
Operating costs rose 6% as cost efficiencies were more than offset by higher incentive compensation and volume-related costs. Cost of credit rose 15% in Q4 as the allowance for loan losses rose 4% to $12.8 billion, and non-accrual loans rose 12% to $4.1 billion, due primarily to corporate non-accruals soaring 45% to $2.2 billion.
Total loans at the end of the year were $699 billion, while total deposits were $1.1 trillion, showing gains of 2% and 6%, respectively. Citi’s loan-to-deposit ratio is the lowest among the big four banks at just 64%
Full-year earnings-per-share came to $8.04 in 2019, a 21% increase over 2018. Citi’s robust share repurchase program was responsible for about half of the gain by reducing the float, while dollar earnings growth was responsible for the other half.
Our initial estimate for earnings-per-share for 2020 was $8.40, but we’ve reduced that to $6.30 on COVID-19 impacts. We see Citi’s exposure to its credit card business as somewhat worrisome given the immense uncertainty around the ultimate impact of the virus, but we also remain bullish long-term on Citi’s future.
Source: Earnings presentation, page 12
Citi has spent the past several years repairing its balance sheet, as we can see above. The company has kept its capital positions well above regulatory norms while still returning tens of billions of dollars to shareholders, as well as boosting its tangible book value per share, which was $70 at the end of 2019. Against the current share price of $41, that value looks quite attractive.
The dividend was slashed to essentially nothing during the financial crisis but is back to $2.04 per share after years of strong growth. We see continued strong dividend growth for Citigroup moving forward, adding another attractive element to the stock.
Its current yield is very high at 4.9%, so it can already be considered a strong income stock. And, we see the payout rising significantly in the coming years due to the company’s healthy payout ratio of just 32% and positive earnings growth outlook. The temporary decline in earnings from COVID-19 should not derail long-term dividend growth.
Citigroup’s current price-to-earnings multiple of just 6.5 is well under our estimate of fair value at 10 times earnings, and as a result, we see the stock as very attractively priced. Citigroup’s average earnings multiple is lower than that of its peers as it has been the one in the group with the most improvements to make. Given how cheap the stock is today, we expect valuation multiple expansion to provide a ~9% tailwind to total returns in the future.
We still see total returns of about 21% annually going forward, consisting of the current 4.9% dividend yield, 8% earnings-per-share growth, as well as a large tailwind from a rising valuation.
Citigroup looks extremely attractive for those seeking growth as well as rising dividends, and the recent bout of weakness in the stock has put it in deep value territory as well. We see Citi as the most attractive of the largest U.S. banks today, and rate the stock a buy as a result.
The big U.S. banks have come a long way from the Great Recession, when their very survival was in question. A decade removed from the Great Recession, the 4 major U.S. banks are on much firmer financial ground. JPMorgan, Bank of America, Wells Fargo, and Citigroup have returned to consistent profitability, with much stronger capital ratios and balance sheets.
The future outlook for the big banks as a whole remains positive, due to U.S. economic growth. The impact of COVID-19 is as yet unknown, but we see the impact as a 2020 issue and thus, investors with a long-term horizon should find the U.S. banks to be attractive. All four offer strong yields, dividend growth potential, and reasonable or very cheap valuations. We like Citi the best, but note that all four stocks are in buy territory today.