Hit the rewind button and go back to last year's first quarter. The U.S. Treasury had large stakes in the nation's banks, Citigroup (NYSE: C) traded under a buck, bank dividends had been slashed and things generally looked Ugly, with a capital U.
Fast-forward one year and the latest FDIC Quarterly Banking Profile paints a much brighter first quarter picture. Bank industry profits are up dramatically; over half the banks reported earnings growth, and most of the TARP money has been paid back.
Some other high points of the report:
- Net interest margins at a seven year high.
- Noncurrent loan growth slowing.
- Capital ratio increased over 2009.
And, a few low points:
- Loan losses still growing.
- Total deposits fell.
- The FDIC 'Problem List' is still growing.
Despite the low points, the FDIC report shows a much healthier banking industry compared to a year ago -- and, yes, last year was a pretty low bar. The key question for investors is whether the clearer future and improving prospects for banks make the sector a buy. To help answer that question, the FDIC data includes Return on Asset (ROA) and Return on Equity (ROE) history.
|
Metric |
2010 |
2009 |
2006 |
2005 |
|---|---|---|---|---|
|
ROA |
0.54% |
0.16% |
1.28% |
1.28% |
|
ROE |
4.96% |
1.66% |
12.3% |
12.43% |
Source: FDIC First Quarter 2010 Quarterly Banking Profile. 2009 and 2010 values are annualized first quarter values; 2005 and 2006 values are for the calendar year.
This shows that even with the improvements over the past year, IF -- and that's a big if -- banks can get back to return levels of 2005 and 2006, there's still a lot of room for earnings to grow.
OK, so there's room for earnings to grow, but is that potential already priced in? Here's a quick look at some of the biggest banks to see how they stack up.
|
Bank |
ROA |
ROE |
P/E Ratio |
|---|---|---|---|
|
Bank of America (NYSE: BAC) |
0.2% |
2.5% |
15.0 |
|
Citigroup |
0.1% |
0.9% |
11.3 |
|
JPMorgan Chase (NYSE: JPM) |
0.5% |
7.1% |
11.5 |
|
US Bancorp (NYSE: USB) |
0.7% |
8.1% |
14.5 |
|
Wells Fargo (NYSE: WFC) |
1% |
11.6% |
14.5 |
Source: Motley Fool stock quotes.
Citigroup stands out from this group. The stock trades at the lowest multiple of this year's earnings estimate and IF -- another big if -- Mr. Pandit and company can bring returns on assets and equity up to industry averages, Citi has the potential to multiply results even without revenue growth. Some of that improvement is certainly baked in to the 2010 estimates, but Citi's got some room to run.
Banking is still a tough sector that's full of risks. We don't know how European debt might impact the banks, Congress is working on financial reforms, loans are still deteriorating, unemployment is still high and there are still a lot of troubled banks out there.
Bank share prices have pulled back with the recent market slide and are starting to look reasonable. There are still plenty of risks, but Citigroup is starting to look like a good buy. And I can't believe I just wrote that.
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