Banks are as healthy as they have ever been, and thanks to lower tax rates and rising interest rates, the future looks even rosier than the recent past. Starting later this week, the nation's largest banks will report their results for the second quarter, kicking off financials earnings season.
The best buy of the big four
Matt Frankel (Bank of America): Out of the "big four" U.S. banks -- that is, JPMorgan Chase (NYSE:JPM), Bank of America, Citigroup (NYSE:C), and Wells Fargo -- it's tough to make the case that Bank of America doesn't offer the best combination of growth and value.
And it's tough to overstate just how impressive Bank of America's turnaround has been in the post-financial-crisis years. The bank has steadily improved its profitability and efficiency, and is now above the industry benchmarks of a 10% return on equity and 1% return on assets for the first time in years.
The bank has done a great job of reducing expenses, in part by reducing its physical footprint and investing heavily in banking technologies. Bank of America's mobile and online platforms have won several awards for their functionality, and the bank's mobile channel usage has grown by 119% since 2015. In fact, Bank of America's consumer banking division operates at a 50% efficiency ratio, which is quite impressive for a big bank.
Despite the improvement, Bank of America trades at a significantly lower price-to-book valuation that JPMorgan Chase and Wells Fargo, and not too much higher than Citigroup, which I consider to be far riskier.
For the money, there's no question that Bank of America is the most compelling big-bank stock.
Light at the end of the tunnel?
Sean Williams (Deutsche Bank): Feel free to call me insane, but I like a little long-term risk in my diet. That's why I believe troubled German banking giant Deutsche Bank should be on your buy list in July.
Deutsche Bank has a laundry list of problems it's contending with. Former CEO John Cryan was ousted in April after his efforts to turn the banking giant around failed to produce bottom-line improvements. The company has also been hit with a bevy of fines that, according to company filings, have totaled $17 billion since 2008. To add to that, both the company's interest income and noninterest income fell during the company's most recently reported quarter. And to top it all off, the Federal Reserve deemed the company's U.S. operations as "troubled" at the end of May.
So, what the heck do I see in such a "troubled" bank? Namely, it's that with new CEO Christian Sewing at the helm, Deutsche Bank is finally focused on what I believe is a winning strategy of cutting costs, redefining its core markets, and possibly de-emphasizing its reliance on investment banking.
Just a little over a month after taking over as CEO, Sewing announced that the bank would be shedding more than 7,000 jobs in order to get headcount "well below 90,000" from just over 97,000. While cost-cutting isn't a long-term fix, it's an easy way to pull levers in the meantime in order to remain healthfully profitable.
The bank has also been divesting unprofitable or low-margin operations in select countries around the world, which should allow it to focus on its core market of Germany, and perhaps the United States. In doing so, it may also reduce its reliance on noninterest income and improve its sensitivity to interest rates, which wouldn't be all that bad given that the U.S. is in a monetary tightening cycle.
Another consideration here is that most of Deutsche Bank's litigation fines and fees should be in the rearview mirror. This should lead to more predictable results, and fewer surprising losses, in the years ahead.
If you're willing to be patient, I believe Deutsche Bank could double in value over the next five years.
Big and cheap
Jordan Wathen (Wells Fargo): This bank has me sounding like a broken record, but I can't help but think Wells Fargo is the most obvious bet in banking right now.
After some high-profile problems surrounding its sales practices (as it turns out, fake accounts were just the start), the bank entered into a consent order with the Federal Reserve that limited its size to just $2 trillion in assets until regulators allow it to grow.
When a bank earns double-digit returns on tangible equity, as Wells Fargo does, shareholders want balance-sheet growth, not stagnation. It was no surprise that shares plummeted on news of the unprecedented regulatory action earlier this year.
Things could soon change. Last month, the Fed said it had no objections to Wells Fargo's plan to increase its dividend by roughly 10% and repurchase about $25 billion of stock. This is a noteworthy event because the Fed had ample cover to object to Wells Fargo's capital plans if it wanted to.
It's important to remember that the Fed stress-tests banks on quantitative and qualitative factors. Failing Wells Fargo for qualitative reasons would have been easy; simply cite its recent missteps in opening fake accounts, selling unnecessary insurance policies, and more. Instead, Wells Fargo received no objection for the largest buyback plan of any big-four bank.
Shareholders may want Wells Fargo to limp along for a little longer. Priced as if a return to growth is years away, Wells Fargo can buy back roughly 9% of shares outstanding thanks to its $25 billion repurchase plan. I expect Wells Fargo to trade higher when it gets the green light to grow, and buybacks between now and then will only add fuel to the fire.