Bank stocks are typically a popular choice for long-term investors. Not only are they generally good bets to perform over the long term, but most also provide investors with solid dividend income for many years. However, with interest rates falling, margins shrinking and economic issues weighing on investors, it's important to choose the right bank stock for your portfolio today, and below, I'll compare two of the biggest banks around: Bank of America (NYSE:BAC) and Citigroup (NYSE:C).
Strong quarterly performance highlights a very good year for Bank of America
Bank of America has been having a very strong year in 2019 as its stock has appreciated more than 30% year to date. The company is coming off an impressive third quarter in which it beat expectations. Revenue was effectively flat from the prior year, but Bank of America's bottom line would have been up by 14% had it not been for a one-time charge related to the end of its agreement with First Data. The companies have been providing merchant services to businesses and first entered into the agreement back in 2009. However, once it expires in June 2020, they will "pursue independent merchant services strategies."
The company's focus has been on trying to add value for its customers while also keeping its costs down. In the third-quarter earnings release, CEO Brian Moynihan stated, "In a moderately growing economy, we focused on driving those things that are controllable. We made continued strong investments in our capabilities to serve customers, more relationship management teammates, more and refurbished branches and offices, and more digital capabilities, all while core expenses are flat."
And with the company hitting 1.6 billion mobile logins in the third quarter, good for a 13% year-over-year increase, it's clear that its focus on convenience and a better experience online has been working: Consumer banking was very strong this past quarter, as loans rose 7% against the prior-year quarter while deposits increased by 3%. Commercial loans also generated growth of 6%.
All that growth isn't going straight to Bank of America's bottom line, either, as the bank recently announced that its hourly employees will be earning a minimum of $20 per hour by April of 2020. Although the raise is not a new development, the timing is, as initially, the organization planned to make the increase effective in 2021. It's a bold move for the bank and a big improvement from the $15 per hour that many of its competitors pay their entry-level staff.
Although the higher wage rate will obviously add more expenses for the bank, the effects could be negated by the positive impact that focusing on social issues like fair pay could have with investors and customers alike. Social responsibility is growing in importance and it's a good way for Bank of America to separate itself from its peers.
Can Citigroup withstand potential headwinds in the consumer segment?
Citigroup (NYSE:C) also had a strong third quarter. Although growth wasn't that brisk on the lending side, the company was able to compensate with revenue growth of 11% in its branded cards during the quarter. However, there wasn't as much breathing room for Citigroup as there was for Bank of America, as the bank beat earnings per share estimates by just $0.02, and revenue of $18.6 billion only marginally outpaced the $18.545 billion that investors expected.
While that's still an earnings beat, it was with the help of a strong consumer segment that may lose its punch if economic conditions get worse. Nonetheless, investors have been bullish on the results as the stock has continued to climb since the earnings release. Year to date, Citigroup stock has appreciated by more than 40% on its way to a new 52-week high. Although the bank stock is trading at only 10 times trailing twelve-month earnings and could be seen as a good value buy, it's also approaching its five-year high of more than $80 a share. It may prove a challenge for Citigroup to continue to grow in value, especially with economic conditions a bit uncertain at present.
CEO Michael Corbat, however, remains optimistic, recently saying: "The consumer, I think, is in very good shape."
Why Bank of America is worth the premium
Bank of America's stock is a bit more of an expensive buy than Citigroup, trading at 12 times earnings and about 1.2 times its book value (Citigroup currently trades at a more attractive price-to-book ratio of 0.93). Investors should also note that the bank has seen its net interest margin (NIM) fall to 2.41% in Q3, which was actually better than analysts were expecting. Net interest margin has been steadily declining: It was 2.45% a year ago and dipped to 2.44% in Q2. By comparison, Citigroup's NIM came in higher at 2.56% this past quarter, but its decline has been much more noticeable, dropping from levels of 2.67% in Q2 and 2.70% in Q3 of last year. Both companies are going to face headwinds relating to lower interest rates, but in Bank of America's case, at least its decline has been a lot more stable.
Overall, Bank of America has had the more impressive financial results, and given its investments in employees and its customer experience, it could become a preferred bank stock by investors and customers for reasons other than just profitability.