Updated on May 18th, 2022 by Bob Ciura
The four major 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.
The coronavirus pandemic was an additional challenge for the financial sector. However, those days have long since passed, and the largest banks are generating profits at rates never seen before.
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 200+ financial sector stocks by clicking on the link below.
The big banks’ dividends were reduced to smaller payouts for years because of the Great Recession of 2008-2009, but in the years since they have resumed their dividend growth. Some have made better progress than others in the financial sector.
We 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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- Big Bank Stock #4: Bank of America (BAC)
- Big Bank Stock #3: Wells Fargo (WFC)
- Big Bank Stock #2: Citigroup (C)
- Big Bank Stock #1: JPMorgan Chase (JPM)
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.
The 4 big bank stocks are ranked in order of expected 5-year annual returns, in order from lowest to highest.
Big Bank Stock #4: Bank of America (BAC)
- 5-year expected annual returns: 6.9%
Bank of America provides traditional banking services, as well as non-banking financial services to customers all over the world. Its operations include Consumer Banking, Wealth & Investment Management and Global Banking & Markets. Bank of America should produce about $95 billion in revenue this year, making it one of the largest financial companies in the world.
Bank of America reported first quarter earnings on April 18th, 2022, and results were better than expected on both revenue and profits. Earnings-per-share came to 80 cents, five cents ahead of estimates. Revenue rose 1.7% to $23.2 billion, which was $110 million better than expected. The bank benefited from higher net interest income from higher lending rates, as well as strong loan and deposit growth.
Source: Investor Presentation
Average deposits were up $240 billion, or 13%, to $2 trillion in Q1. Management said they expect further gains in the coming quarters from a favorable rate environment, particularly given its strong growth in low-cost deposits. Average loan and lease balances were up 8% year-over-year to $978 billion, so the bank still has just over half of its total deposits sitting idle. That could provide a significant loan growth runway should the bank deploy those deposits.
Bank of America noted it has no significant exposure to Russia, and credit loss provisions came to just $30 million in Q1. That’s a huge decline from the benefit of $1.9 billion in last year’s Q1, but those were unwinding COVID provisions that never materialized.
Net interest income came to $11.6 billion in Q1, up from $10.2 billion a year ago. However, non-interest income was down from $12.6 billion to $11.7 billion year-over-year.
Total returns are expected to reach 6.9% per year over the next five years. This makes BAC stock a hold, but not a buy at this time.
Click here to download our most recent Sure Analysis report on BAC (preview of page 1 of 3 shown below):
Big Bank Stock #3: Wells Fargo & Company (WFC)
- 5-year expected annual returns: 10.1%
Wells Fargo was founded in 1852 and provides banking, investments, mortgages, as well as commercial financing products through roughly 7,000 locations in 30+ countries. Wells Fargo has nearly $2 trillion in assets to produce about $73 billion in annual revenue. The bank has relationships with one-third of U.S. consumers through its vast network of offerings.
Wells Fargo reported first quarter earnings on April 14th, 2022, and results were somewhat mixed. Revenue was down 2.6% year-over-year to $17.6 billion, which missed estimates by $230 million. However, earnings-per-share were better than expected, beating estimates by seven cents at $0.88 per share.
Source: Investor Presentation
Non-interest revenue fell 28% from the fourth quarter, and 14% from the year-ago period, as a combination of low loan growth and lower prevailing lending rates crimped revenue. The management team said loan growth picked up a bit towards the end of the quarter, and that credit quality remains strong.
However, it also said that the risk of higher credit losses from a potential recession may hurt loan performance in the quarters to come. Non-interest expense rose $700 million from Q4 to $13.9 billion, but that was still slightly lower than the year-ago period.
Loan balances ended the quarter at $898 billion, up from $875 billion at the end of Q4. Deposits were essentially flat at $1.46 trillion. Net interest margin was 2.16%, up from 2.11% in the prior quarter, and up from 2.05% in the year-ago period. Provisions for credit losses came to a benefit of $787 million, down from a benefit of $875 million in Q4, and a benefit of $1.05 billion in last year’s Q1.
Wells Fargo stock has a 2.4% dividend yield. We expect the company to grow its EPS by 6% per year. Lastly, the stock has a P/E of 10.3, which is below our fair value P/E of 11.5. Total returns are expected at 10.1% per year over the next five years.
Click here to download our most recent Sure Analysis report on Wells Fargo (preview of page 1 of 3 shown below):
- 5-year expected annual returns: 10.7%
Citigroup was founded in 1812, when it was known as the City Bank of New York. In the past 200+ years, the bank has grown into a global juggernaut in credit cards, commercial banking, trading, and a variety of other financial activities. It has thousands of branches, produces about $71 billion in annual revenue.
Citi reported first quarter earnings on April 14th, 2022, and results were much better than expected on both the top and bottom lines. Adjusted revenue came to $19.2 billion, which was down about 2% year-over-year, but beat estimates by nearly $1.2 billion.
Source: Investor Presentation
Likewise, earnings-per-share came to $2.02, which was 56 cents better than expected. The earningsper-share beat was driven by better-than-feared results as Citi came off of a peak in earnings a year ago, in addition to the company’s robust share repurchase activity that saw the share count decline by 6%.
Cost of credit came to $755 million in Q1, which was up very sharply from a benefit of $2.1 billion a year ago. The bank took a build for exposure to Russia, in part.
Operating expenses were $13.2 billion, down 3% from the prior quarter, but up 15% year-over-year. Excluding divestitures, expenses would have risen 10% year-over-year as the bank continues to invest in things like IT infrastructure, partially offset by productivity savings.
We see expected returns of 10.7%, driven by 5% expected EPS growth, the 4.1% dividend yield, and a 1.6% positive impact from an expanding P/E ratio.
Click here to download our most recent Sure Analysis report on Citigroup (preview of page 1 of 3 shown below):
Big Bank Stock #1: JPMorgan Chase & Company (JPM)
- 5-year expected annual returns: 11.4%
JPMorgan was founded in 1799 as one of the first commercial banks in the U.S. Since then, it has merged or acquired more than 1,200 different institutions, creating a global banking behemoth with about $124 billion in annual revenue. JPMorgan competes in every major segment of financial services, including consumer banking, commercial banking, home lending, credit cards, asset management and investment banking.
JPMorgan Chase reported first quarter earnings on April 13th, 2022, and results were somewhat mixed, with revenue coming in ahead of expectations, while earnings missed the mark.
Source: Investor Presentation
Earnings-per-share came to $2.63 in Q1, which was seven cents less than expected. In addition, earnings declined from $3.33 in Q4 of 2021, and from $4.50 in Q1 of 2021. Total revenue was down 5% year-over-year to $30.7 billion, but did beat expectations by $170 million. Provisions for credit losses were $1.46 billion, versus a benefit of $1.29 billion in Q4, and a benefit of $4.16 billion in the year-ago period.
Total loans ended the period at $1.07 trillion, essentially flat with the prior quarter. Total deposits were $2.56 trillion, up from $2.46 trillion as the company continues to take deposits without lending them. We see the loan-to-deposit ratio near 40% as a clear sign of management’s caution into the next few quarters.
Management approved a new buyback authorization of $30 billion, starting on May 1st, 2022. At the current share price, such a buyback would retire about 8% of the company’s outstanding shares.
We expect JPM to grow its earnings-per-share by 6% per year over the next five years. In addition, shares currently yield 3.3%. The stock also appears to be undervalued, with a 2022 P/E of 10.8 compared with our fair value P/E of 12.5. Total returns are expected to reach 11.4% through 2027.
Click here to download our most recent Sure Analysis report on JPM (preview of page 1 of 3 shown below):
The big U.S. banks have come a long way from the Great Recession, when their very survival was in question. A decade-plus 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. While the big banks would be negatively impacted by a recession, 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 JP Morgan the best right now, but note that three out of the four stocks are in buy territory today.
Other Dividend Lists
Investors looking for high-quality dividend stocks outside the financial sector could find value in the following lists:
- The Dividend Aristocrats List is comprised of 65 stocks in the S&P 500 Index with 25+ years of consecutive dividend increases.
- The High Yield Dividend Aristocrats List is comprised of the 20 Dividend Aristocrats with the highest current yields.
- The Dividend Achievers List is comprised of ~350 stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 38 stocks with 50+ years of consecutive dividend increases.
- The High Yield Dividend Kings List is comprised of the 20 Dividend Kings with the highest current yields.
- The Blue Chip Stocks List: stocks that qualify as Dividend Achievers, Dividend Aristocrats, and/or Dividend Kings
- The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
- The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.