The banking sector was one of the market's best performers of 2017 and could be poised to have another great year in 2018. Tax reform could boost profits by billions, rising interest rates could result in wider profit margins, and continuously evolving banking technologies could lead to better efficiency.
With that in mind, here are three banks that could deliver excellent performance in 2018 and beyond.
Image Source: Getty Images.
|
Company (Symbol) |
Recent Stock Price |
Market Capitalization |
Dividend Yield |
|---|---|---|---|
|
Bank of America |
$32.01 |
$333.9 billion |
1.5% |
|
JPMorgan Chase |
$114.09 |
$395.9 billion |
2% |
|
Goldman Sachs |
$258.92 |
$97.7 billion |
1.2% |
Data Source: TD Ameritrade. Stock prices and dividend yields as of 1/23/18.
A great turnaround story
Bank of America (BAC 0.87%) has improved dramatically since the financial crisis. In fact, I'd go so far as to say the company has been the most remarkable turnaround story of the big banks.
To get an idea of just how much Bank of America has improved since the financial crisis, take a look at how some of its metrics from 2010 compare to this past year's. And keep in mind that 2010 actually represented a dramatic improvement over the financial crisis in many key areas, such as nonperforming loans.
|
Metric |
FY 2010 |
FY 2017 |
|---|---|---|
|
Net income |
($2.2 billion) |
$21.1 billion |
|
Diluted EPS |
($0.37) -- $0.86 excluding impairment charges |
$1.83 |
|
Tier 1 common equity |
8.60% |
11.8% |
|
Tangible book value |
$12.98 |
$16.89 |
|
Nonperforming loans |
3.49% |
0.69% |
|
Return on equity |
4.1% |
7.9% |
|
Efficiency ratio |
92% |
62% |
Data source: Company Financials.
The bank continues to improve, even eight years post-crisis. The bank's profitability -- return on equity and return on assets -- continues to climb and is getting close to the key 10% and 1% industry benchmarks. Thanks to investment in technology and reduction in its branch count, the bank's efficiency continues to get better, and now rivals even the most solid big U.S. banks. And it's worth mentioning that Warren Buffett's Berkshire Hathaway recently became the bank's biggest investor.
Image Source: Bank of America.
Despite all of the improvement, there's reason to believe that Bank of America's best days are ahead. The bank generally operates at an effective tax rate of around 30%, and this should drop significantly going forward. Additionally, with a massive base of low-cost deposits, the bank stands to benefit from margin expansion as the Federal Reserve raises interest rates.
Firing on all cylinders
JPMorgan Chase (JPM +0.17%) is the most expensive stock on this list in terms of its stock price relative to its assets:
|
Company |
Price-to-Book Value |
Price-to-Tangible Book Value |
|---|---|---|
|
JPMorgan Chase |
1.74 |
2.17 |
|
Bank of America |
1.35 |
1.90 |
|
Goldman Sachs |
1.51 |
1.60 |
Data Source: Company financials and author's own calculations
However, you get what you pay for. Its return on equity (ROE) and return on assets (ROA) are significantly above the 10% and 1% industry benchmarks, and its recent growth has been among the most impressive in the industry. Its consumer-banking business saw revenue rise by 10% over the past year, fueled by margin expansion and strong growth in its auto loan portfolio.
The bank ranked No. 1 in global investment banking fees for 2017, and its commercial-banking division produced its highest revenue ever on 20% year-over-year growth. Finally, JPMorgan's asset and wealth management business saw a total of $40 billion in net inflows, significantly outpacing most peers.
Like the rest of the industry, trading revenue was a weak spot for JPMorgan Chase in 2017, with a 34% year-over-year decline in fixed-income trading. This is to be expected in a low-volatility environment and is an unfortunate side effect of a multi-year bull market and improving economy. However, it tends to help mitigate revenue declines in tough times, as volatility tends to rise during falling markets.
As far as forward catalysts go, JPMorgan Chase's management has said that it expects a 19% effective tax rate in 2018, which should mean several billion in additional net income. And with more than $1.4 trillion in deposits, about $400 billion of which are noninterest-bearing, the bank should be a big beneficiary of margin expansion, as well.
A buy after weak trading results
First, the bad news. Goldman Sachs' (GS 0.67%) trading revenue was absolutely awful. Fixed income, currency, and commodities trading revenue dropped by 50% -- far worse than JPMorgan Chase's 34% and Bank of America's 13% drops. And it doesn't look like Goldman will benefit as much as expected from tax reform, at least not at first. Analysts were hoping for an effective tax rate of 17%, but Goldman announced that it expects a rate of 24% in 2018.
Aside from these issues, however, Goldman Sachs is looking rather strong. Goldman's earnings and revenue for 2017 beat expectations, and its investment-banking business is doing well. In fact, Goldman has the top market share in announced and completed mergers and acquisitions (M&A), and in equity and common stock offerings. For the year, Goldman's investment-banking revenue grew by an impressive 44%.
While it's not a major part of Goldman's business just yet, the young Marcus consumer-banking platform could evolve into a major revenue source. After just over a year, the platform had originated more than $2 billion in loans with its simplified, consumer-focused process, and also took in more than $5 billion in deposits, thanks to offering some of the industry's highest rates on savings accounts.
Trading revenue generally suffers in low-volatility environments, and the current environment is about as low volatility as it gets. If volatility picks up and Goldman's trading revenue jumps, the bank's current share price may seem very cheap.
