Roundtable: Buy This Bank

Over the last year, banks have gone from the investment no one cared about (we know from our past reader interest) to the "it" industry that drives the markets.

Hence, it's time to play: "If I had to buy a bank." For our picks, we'll stick to the big guys that are dominating the news. The choices are:

Stock

Market Capitalization

Share Price

JPMorgan Chase (NYSE: JPM  )

$181 billion

$46

Bank of America (NYSE: BAC  )

$150 billion

$17

Wells Fargo (NYSE: WFC  )

$141 billion

$30

Citigroup (NYSE: C  )

$105 billion

$4.60

Goldman Sachs (NYSE:  GS  ) $95 billion $186

US Bancorp (NYSE: USB  )

$45 billion

$24

PNC

$21 billion

$45

So, if you had to, which big bank would you buy at today's prices?

Morgan Housel:
At these prices, options are growing slim. But if there's one bank I'd say has fully earned its respect, it's JPMorgan Chase.

I'd compare JPMorgan to a cross between Goldman Sachs and Wells Fargo. It's a world-class investment bank tied to a commercial bank that isn't obliterating itself with loan losses. There really isn't anything comparable to it. You've got Goldman, which is minting money from trading, but not much else, making it quite vulnerable to incoming regulations. Plus, the entire world wants to see Goldman die. Then you've got Wells Fargo, which has one of the better loan books in the industry, but its investment banking presence is so slim that even slight deteriorations in that loan book are felt. JPMorgan is the best of both worlds. It's in all the right places without getting into serious trouble. I can't think of any other major bank that can say that today. 

Alex Dumortier: I expressed my thoughts on Wells Fargo in some detail recently, so I'll leave the California lender out of the running this time.

All banks within this group are now trading above book value except for two "problem children" that have been lumped together: Bank of America and Citigroup. While it's true that they are the only two major banks that required multiple TARP capital infusions, they do not face the same challenges.

At this stage, Bank of America could well be the best bet in this group, not because it is the class of the field, but because the handicapping on BofA shares is off, i.e., investors misunderstand and, hence, are mispricing the firm's true earnings power. It should be clear to all that the crisis has solidified Goldman Sachs' and JPMorgan Chase's position at the top of this group, but it takes more effort to figure out how things will shake out for the other institutions, particularly a "problem child." That's the very reason bank stock-pickers should consider spending some time looking at BofA.

Matt Koppenheffer: Investing wisdom holds that there is opportunity in uncertainty, and that has certainly held true for financial shares over the past seven months. But for my pick I'm going to go ahead and shy away from uncertainty.

That means that though Wells Fargo may have the best core banking operations of the big banks, the Wachovia skeleton in its closet (and Golden West along with it) is keeping me away. Bank of America, Citigroup, and JPMorgan Chase, meanwhile, have all had less-than-stellar showings from their banking operations, and it's still unclear exactly how recent acquisitions will play out for B of A and JPMorgan.

So where do I see the least uncertainty right now? Goldman Sachs. The company has shown a Chuck Norris-like deadliness when it comes to raking in cash no matter how crazy the markets get and it seems very well positioned to make a killing during the recovery. These certainly aren't shares I'd stash away in the "keep forever" pile, but at least for the near term, Goldman looks like the place to be.

There you have it. Three analysts. Three "gun-to-our-heads" bank picks. What are your thoughts? Share them in the comments section below.

This roundtable article was compiled by Anand Chokkavelu, who owns long-held shares of Citigroup. The Motley Fool has a disclosure policy.


Read/Post Comments (31) | Recommend This Article (95)

Comments from our Foolish Readers

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  • Report this Comment On October 20, 2009, at 1:27 PM, JGBFool wrote:

    I think USB is one of the best, but I think there is still some turbulence ahead for all the banks, unless the commercial real estate "bubble" isn't actually a "bubble".

  • Report this Comment On October 20, 2009, at 2:39 PM, miteycasey wrote:

    JPMorgan twice the market cap at 1/4 the price of GS.

  • Report this Comment On October 20, 2009, at 2:42 PM, Hairy0524 wrote:

    Good article, but I'd really like to get their input on the bigger regional banks that are out there. If you're looking for a risk to take with potential big rewards, the regional players are a better way to go in my opinion. The easy money has already been made with the big players.

  • Report this Comment On October 20, 2009, at 2:44 PM, rd80 wrote:

    Recommend double checking the market cap for Citi. I suspect the number in the table doesn't include the preferred conversion.

  • Report this Comment On October 20, 2009, at 5:09 PM, mvv3 wrote:

    Where are the experts placing Northern Trust?

  • Report this Comment On October 20, 2009, at 5:11 PM, TMFEditorsDesk wrote:

    @rd80,

    Ah yes, you're correct...when I pulled Citi's market cap from Yahoo!, it wasn't updated yet and I forgot to make the adjustment...We updated in the table above (Yahoo!'s got it updated now, too).

    Many thanks,

    Anand (TMFBomb)

  • Report this Comment On October 20, 2009, at 5:23 PM, Salukilover wrote:

    I doubeled my money on BofA and got out. Now it is still a little to rich for me to go back in. My entry point is $12.00 for safety.

  • Report this Comment On October 20, 2009, at 5:32 PM, drsl wrote:

    With no gun at my head, I went long on CFR @ $45, and think there's up side left, with no big risk.

    No interest in more of any of those suggested, though I'm long on WFC for some time.

  • Report this Comment On October 20, 2009, at 6:05 PM, 7footmoose wrote:

    GS and JPM are probably the only safe bets but they are either fully valued or nearly so. WFC is a well run bank but it has the potential for the WB and GoldenWest toxic assets to derail the banks recovery. BTW: they have yet to repay the government. I like USB and PNC but fear the lingering affects of the looming commercial real estate melt down. I own BAC going back a lifetime but would not put more into it. Citi is a very long shot. They were dysfunctional before the government got involved. How could one think they could escape now? Any new money invested today would have to go to USB. They will probably be called upon to take over the next big failure. They have not had much negative press and they have repaid the government.

  • Report this Comment On October 20, 2009, at 6:25 PM, Pat999 wrote:

    I want to question the whole premise of this discussion. Banks WERE the "it" industry that drove the markets from late 2008/early 2009 to about May 2009.

    Now the banking sector is a sector that has seen massive rallies on very little in the way of real positive results (BofA lost 1.2 billion dollars last quarter, for example, yet the share price went from about 2.50 to18+ and is now around 17). And if the sector is still driving the S&P, it drove it down this earnings season.

    Corrections have occured but I think we need to see some TARP paid back and some significant profits before we should start looking at the banks.

    Yes, I know GS made an obscene amount of money, but both they and JPM have p/e ratios above 39. And even GS lost 3% after announcing earnings. Makes you wonder what people were/are expecting.

    The world hasn't ended and for that reason banks staged a huge rally but we can't expect them to keep going up until they actually make some progress.

    If you really must buy a bank, I'd like to extend the scope and suggest you look outside the USA. Many countries banks are listed on the NYSE and are in much better shape than anything mentioned in the article.

    Disclaimer:holding long BAC because I bought in low. Would not buy at current price and am holding for the sake of my own interest. Have unloaded about 75% of my original shares.

    Finally, @ miteycasey, the reason JPM has twice the market cap and 1/4 the price of GS is that it has 8x as many shares. Although your post was technically correct, it means nothing.

  • Report this Comment On October 20, 2009, at 7:06 PM, texastar1 wrote:

    JPM is a great buy at $40 and I believe that it will get there once we see the overall market pull back in November. BAC will be a good buy at a $12 entry point.

  • Report this Comment On October 20, 2009, at 7:53 PM, Joemit wrote:

    Sold citi as a massive loss, thanks.

    Kept JP Morgan and added 500 shares of BAC at less than 5. Lowered cost basis for that stock but still a loser, now. I think it will gain over the long run as well as any of the banks listed.

    I worried too much about capital gains tax when BAC was $65.00 to sell. I need to stop making that mistake!

    Disclosure _ Long JPM and BAC

  • Report this Comment On October 20, 2009, at 8:50 PM, makeabet wrote:

    I don't care for B of A but JPMorgan is interesting and possibly USB.

    What's in store for Morgan Stanley--not looking good.

  • Report this Comment On October 20, 2009, at 9:42 PM, jesse2159 wrote:

    If making money was my only criteria, I'd buy bank stocks. But, I find investing in banks as repulsive as buying cigarette stocks. I got rich by investing in honorable companies that actually produce something tangable or worthwhile. Banks borrow from the Fed at zero interest and lend it out at 20% for credit card rates. They produce nothing but obscene profits at the expense of those who can least afford it. My only wish is that they go bankrupt and we can start all over with some honorable bankers...(when pigs fly)

  • Report this Comment On October 20, 2009, at 11:17 PM, gmmpa wrote:

    JPM still has value at the current price. Those that follow the stock may remember they reduced the dividend to save 5 billion a year to help pay back the TARP borrowing. They paid it back and the cost of money is still low. JPM is leveraged at about 19:1 they will continue to earn good profits. Should they reinstate the dividend the stock should be more appealing to long term investors.

  • Report this Comment On October 21, 2009, at 6:52 AM, arkirby3 wrote:

    I think the best answer to this question would be to buy a basket of these stocks... buy a few of all of them.. although I disagree with including Citi in with that basket. I have already chosen to purchase shares in Wells, Goldman, BofA, and JP Morgan. I have not regretted the decision in the least.

    Also... I'm keeping close watch to see what happens with GMAC. I'm thinking... "maybe."

    "Until 2006, GMAC was a wholly owned subsidiary of GM. On Nov. 30, 2006, GMAC began a new era as an independent finance company when GM sold a 51 percent stake in the company to a group of investors led by Cerberus Capital Management, L.P."

  • Report this Comment On October 21, 2009, at 8:06 AM, sentinelbrit wrote:

    6 months ago MF wouldn't touch a bank. Now after most banks have at least doubled, valuations have risen substantially, a lot of good news is priced into the stocks, banks are being recommended. JPM and GS have proven they are the leaders. Money will be made on those banks where uncertainty still persists as reflected in valuations and sentiment. I think PNC still represents good value. Many investors think regionals are going to face a tough time in the year ahead. This is where a positive surprise could emerge.

  • Report this Comment On October 21, 2009, at 9:32 AM, JakilaTheHun wrote:

    Why invest in any of them at this point? Bargain prices are gone, so your downside exposure and upside potential is much more limited now. If you're buying in at this point, you're buying for quality and possibly some value, but I'd rather look beyond these banks for quality.

    BB&T (BBT), SunTrust (STI), and a slew of smaller, less well-known commercial banks offer the best potential returns to investors.

    BB&T is a quality play; it's not "value priced" per se, but they've done a good job throughout this crisis and could see benefits in the future.

    SunTrust is still available at somewhat of a discount and might be one of the better value picks amongst the major players in the banking industry.

    The lesser well-known small commercial banks are getting destroyed on the Street right now. Finding quality banks in this grouping will be where the biggest returns are made.

  • Report this Comment On October 21, 2009, at 10:20 AM, LammieL wrote:

    The edge goes to JPMorgan - Dimon has real good competitive instincts.

  • Report this Comment On October 21, 2009, at 4:35 PM, Celtics17 wrote:

    I'll go with none of the above, and no banks for that matter.

  • Report this Comment On October 23, 2009, at 12:06 PM, jmcnult wrote:

    Good food for thought, but how about doing a similar analysis for Regional Banks. I am looking for well managed under priced Regional Banks.

  • Report this Comment On October 23, 2009, at 12:17 PM, starfish36 wrote:

    "Capitalism v. Regulation" poses another false choice. Capitalism cannot exist without regulation. Check out the events leading to the Great Depression and the events over the lost years of the last twenty years, when regulation was very lax, "derivatives" were in vogue, subrime lending was a way of competition, and bonuses for worse than mediocre performance were through the roof. We're paying a large price for our myopia and refusal to learn form history.

  • Report this Comment On October 23, 2009, at 2:19 PM, masterN17 wrote:

    Big bank rallies are done. I agree with the comments about smaller regional banks that haven't caught the recovery hype and are still underpriced.

  • Report this Comment On October 23, 2009, at 2:22 PM, AnnaRetzek wrote:

    Goldman is the best banking investment

    1. they have conservative risk management controls that are the envy of the industry

    2. recent earnings have been generated with significantly less leverage

    3. weaknesses in certain segments of their business are usually more than offset by performance in other sectors

    4. versus the competition, they are better positioned in emerging markets where growth prospects are more favorable.

    5. exposure to US commercial RE is not material

    There is also the difference between an idiots and "fools."

    Idiots believe that the Government bailed out Goldman when they recapitalized AIG. Fools know that Goldman held AIG collateral that covered all but about $300 million of Goldman's total AIG exposure. That was not material!

  • Report this Comment On October 23, 2009, at 3:09 PM, GSmith42 wrote:

    Why buy one of these when you can buy the most solid banks in the world with a stronger currency as well?

    You know them in your neighbourhood by these names - TD, RBC and CIBC - Toronto Dominion, Royal Bank of Canada and Canadian Imperial Bank of Commerce.

    There were no bailouts in Canada. Look North.

  • Report this Comment On October 24, 2009, at 12:49 AM, stockmajor wrote:

    I'm long Citi with confidence. Give 'em a couple of years and see.

  • Report this Comment On October 24, 2009, at 10:00 AM, RadioFreePG wrote:

    Well, you can go long on any of these, but you need to pick an exit strategy with ALL of them and stick to it. I used to own Chase, Citi, BAC and WashMut because I love dividends and dividend investors typically do not develop exit strategies over the long term, so I got hurt pretty bad. I am done with banking for now....No matter how much they scream, no matter how much they beg; don't buy and hold for dividends.

  • Report this Comment On October 24, 2009, at 3:40 PM, MKantzler wrote:

    There are some who interpreted Citi’s sale of its Phibro unit to Occidental Petroleum as making it a loser, which is about as senseless as making a buy or sell decision on Fed Chmn. Bernanke’s statement that rates will go up when the economy improves sufficiently. Of course the rates will go up–then. It was a say-nothing statement, yet investors react to it, or, at least, talking heads do, as though there were some trace of actionable consequence.

    With Citi, the news of the Philbro sale is both actionable, and not. Actionable to buy, or inert to hold, because the sale is a good move, a sensible move, a move that sheds a liability and a non-banking enterprise in a circumstance where focusing on banking is the necessary imperative that will eventually build a stable, profitable, globally present, government-divested, large-cap institution with multi-spectrum, financial-services experience. That experience, while now being shed, remains a building resource for the future which, without the irresponsible derivatives risks, can again expand Citi’s profitability and propel it back to the top of the banking world, where, despite its domestic troubles, it still is in its Treasury and Trade Solutions business, which was voted the number 1 Cash Management Bank, globally, for the third consecutive year in Euromoney’s annual cash management poll. In addition to retaining the top spot in the global Euromoney poll, Citi also took top client-voted honors with five regional awards and 24 country awards.

    And look at the guarantees! Guaranteed, by public statements of President Obama, Treasury Secretary Geithner and Fed Chmn. Bernanke not to fail, with government ownership of one-third and massive incentives for Citi to continue improving to throw that yoke.

    And, again, more guarantees for Citi to improve, like insured loans, and it will continue to enjoy .25% interest on its loan reserves for at least another quarter as it continues to rake in money on the loan spread and its fees. American Exppress had good news in the third quarter on a marked improvement in loan losses and credit usage, and while AMEX’s clientele is more stratified than that of other card issuers, that result does reflect upon the industry and Citi’s loan-revenue situation.

    And again, another guarantee, as the president’s compensation czar, Kenneth Feinberg, allowed multi-million pay packages to stand for some executives at Citi and some of the other six institutions that faced cuts. If there were any perception at all that Citi was not on the way to growth and recovery, or remained at risk of failure, not a single executive salary would be spared the axe.

    As the merging of Citi’s outstanding international standing with its improving domestic business elevates profit and market reach, and the outcome becomes more clearly envisioned by investors, Citi’s equity prices, in the $5.00 realm, will never be seen again as Citi moves on beyond single digits. The March low of $1.00/share was a rare, once-in-a-lifetime opportunity. Guess what? Right now, priced below $5, Citi is presenting another, final opportunity for investors with vision and the realization that Citi is here to stay, so the news of any steps bringing that future closer, whether it’s the sale of Philbro or slashed executive salaries, and the meaningful exclusions, these are hardly the headlines of a loser.

  • Report this Comment On October 25, 2009, at 2:34 PM, Hoxsie454 wrote:

    Just as GSmith42 wrote, Canada's big banks are robust and Canada's economy is triving. That fact is the major reason that five years ago I transferred all of my security investment business to a Canadian brokerage. I see nothing in this article to inspire me to change course at this time. There are good buys among U. S. banks in the lower third of asset size, but count me out as to jumping into the witches' cauldron of banks "too big to fail". Happy Halloween!

  • Report this Comment On October 25, 2009, at 7:17 PM, wintrwman wrote:

    As far as financial investments unless you are young with a long hold option keep your money in your pocket. Until strict regulations and enforcement is put in place we all have invested in this segment of the market. Why throw good money after bad.

  • Report this Comment On October 27, 2009, at 4:02 PM, youngblood58 wrote:

    I like Barclay's above all those mentioned in the article.

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