Given how challenging things have been for banks over the past decade, it's easy to forget just how much money they earn. But while all four of the nation's biggest banks rank among the most profitable companies in the country based on their bottom lines, there's one bank that earns more than the others: JPMorgan Chase (NYSE:JPM).
In 2016, JPMorgan Chase earned an astounding $22.6 billion in net income applicable to common stockholders. I'll be the first to admit that adjectives like "astounding" are overused, but it's an appropriate choice of words here.
- Wells Fargo ranked second, with 2016 earnings of $20.4 billion.
- Bank of America ranked third at $16.2 billion.
- Citigroup ranked fourth at $14.9 billion.
And it's not just that JPMorgan Chase earns more on an absolute basis, which isn't a huge surprise given that it is the biggest bank by assets. JPMorgan Chase is also the most profitable when you normalize for the size of these banks' balance sheets.
You do this by dividing a bank's net income applicable to common stockholders (net income less dividends on preferred stock) by its tangible common equity. This shows how much profit a bank squeezes out of every dollar's worth of high-quality capital on its balance sheet.
In the fourth quarter, JPMorgan Chase's return on average tangible common equity came out to 13.9%. That handily exceeds the 10% mark that analysts and investors cite as the threshold between creating and destroying value after factoring in an investor's opportunity cost of not stashing their money elsewhere.
Here's how that compared to its peers:
- Wells Fargo came in second, with a return on average tangible common equity of 13.2%.
- Bank of America was third at 8.7%.
- Citigroup was fourth at 8%.
This is an impressive feat for a number of reasons. But most of all because it means that JPMorgan Chase has, at least temporarily, eclipsed Wells Fargo as the most profitable big bank in the country.
There's no question that JPMorgan was helped in this regard by Wells Fargo's troubles over the past year. It was revealed in September that the California-based bank had opened up millions of fake accounts for customers in order to boost its cross-sell ratio. And soon thereafter, the Federal Reserve announced that Wells Fargo would be subjected to additional regulatory scrutiny after its living will failed to live up to regulators' expectations.
Yet, Wells Fargo's missteps shouldn't take away from JPMorgan Chase's own efforts. Given that interest rates are finally on the rise, the New York-based bank's bargain basement acquisitions of Bear Stearns and Washington Mutual in 2008 are finally beginning to materialize in a much more meaningful way.
JPMorgan's stock isn't cheap, but it could very well end up being one of the bank industry's biggest winners this year.