Wells Fargo vs. Bank of America: Where Would You Put Your Money?

Motley Fool analyst Matt Koppenheffer sits down with Rick Engdahl for a side-of-desk interview about banks. Are they really that hard to understand? Can the big banks be trusted? Join us for a discussion that sheds some light on banks from Citigroup (C -0.32%) to Wells Fargo (WFC -0.56%), as well as some of the smaller players.

Few would argue that reliable, low-risk Wells Fargo is a great bet for many investors. Meanwhile, Matt takes a look at the potential upside of Bank of America (BAC -0.13%) and Citigroup, discussing the issues they've faced, how they've responded, and where they may be headed.

A full transcript follows the video.

Rick Engdahl: Just looking at this from my perspective, after talking it through and having previous conversations, I always come back to Wells Fargo. As somebody who likes to invest in quality companies, that seems to stand out. I know it has a higher multiple, and some of that quality is priced in.

Is that still, in the larger scheme of things over time, is it still fairly valued, do you think? Just talk a little bit about Wells Fargo and the difference between say a Citigroup, which seems to me to be less clear, to be dependent on other factors that are out of its control, et cetera, et cetera, whereas Wells Fargo has proven through the crisis that it's a stalwart bank.

Is it worth paying that premium? To me, it seems like it would be.

Matt Koppenheffer: Yeah. I think what you're looking at with Wells Fargo is, assuming everything goes the way I expect it to, which often isn't the case, but assuming that happens, I think that there are better returns to be had from some of the other banks, but in terms of the quality and the reliability and the lower risk that you get from Wells Fargo, I think the returns that are available from that stock are still very attractive today.

I think that there's more potential upside from a Bank of America or from a Citigroup, but if you're worried about how well you'll sleep at night, how well you can understand the bank and the risks that you face ... let's say we had another major downturn next year. I would feel very comfortable owning a Wells Fargo, versus a Citigroup.

Rick: The greater returns that you might expect from one of the other banks, that's because they're more beaten up, right? They've been beaten up in the press, they've been beaten up in the markets as well.

Matt: Yup.

Rick: A lot of that is justified, so I still come back to -- kind of in the rule-breaker's model of buying things that people say are overvalued -- they're still going to be stronger in the end because if you're looking at the long-term picture of which is the actual better business, today's price doesn't matter that much. You're buying the stronger business.

That's where I, again, come back to that. Is that ... I don't mean to contradict you or whatever ...

Matt: No, no, no.

Rick: I'm just trying to push at that a little bit.

Matt: No, no, no. That makes sense.

I think the driver for -- if we focus on Bank of America and Citigroup for instance -- JPMorgan Chase (JPM 0.49%), I actually put with Wells Fargo. I think JPMorgan is a very high-quality business. In fact, I think what makes it so attractive is that it's a collection of high-quality businesses. But let's leave that aside for a second.

With Bank of America and Citigroup in particular, it's not a question of, "Here's these businesses pre-crisis. They get clobbered during the crisis, and now they're really cheap and we're going to buy the same businesses today at just a really cheap price."

The story there is really, how have they changed? What kind of changes are they making to make themselves better businesses going forward?

If we look at Bank of America, for instance, really the chief reason -- or one of the key reasons -- that we're not talking about it as if it's Wells Fargo today, in my mind, is because it acquired Countrywide Financial and, to a lesser extent, Merrill Lynch.

Merrill Lynch brought a lot of losses, but nowhere near the amount of losses of Countrywide, and nowhere near the legal liability and the press headlines and everything else as Countrywide.

Part of that was that, prior to the financial crisis, Bank of America was run by a guy named Ken Lewis. I won't spend a whole lot of time disparaging Ken Lewis, but one of the things that Lewis was fixed on was making Bank of America huge and dominant, and a challenge to the big Wall Street banks.

When Lewis had an opportunity to acquire big things, he did it. He thought Countrywide was a great opportunity at the time. It wasn't, it was terrible.

When we look ahead, what I see at Bank of America is they're working through the legal liability from Countrywide, basically erasing the memory of Countrywide, and getting Bank of America back to the strong bank that it was -- because it was a strong bank -- and at the same time, continuing to integrate Merrill Lynch.

Merrill Lynch, the timing and the price of that purchase, was not ideal. But there's a very strong investment banking franchise there. There's a very, very strong brokerage franchise there, and they've already started to integrate that across the rest of the bank.

They have a product called Merrill Edge, which kind of gives ... Merrill Lynch focuses on higher-wealth clients, and now you've got customers that have assets of less than $250,000 that have access to the Merrill brand, and the Merrill brand is something that's known. It's a quality brand, so you start to see things integrated across there and you start to see more of a vision for Bank of America becoming a better business. That's what I think about going forward there.

With Citigroup it's kind of a similar dynamic, with a different story. Before the financial crisis, I don't really know... I didn't have a good sense of what Citigroup wanted to be. It did a lot of things; the "financial superstore" was the theme there.

That was fine, but I don't know. I don't know if that helped lead to some of the problems, but it just seemed that they were trying to get profit wherever they could, and then everything fell out. Citigroup was a disaster during the financial crisis.

It was a home-grown disaster, whereas Bank of America purchased Countrywide and that caused a lot of problems. Citigroup kind of built itself, and earned itself, its problems.

But now, when we look forward, we've gone through two different CEOs. This is the second different CEO since the financial crisis. Chuck Prince was Citigroup's CEO before and during the financial crisis. Vikram Pandit came in, he was the CEO for a little while, and then they replaced him with this guy Mike Corbat.

The interesting thing about Mike Corbat is he's a banker. He's more of a traditional type banker. The chairman of Citigroup is now a guy named Mike O'Neill.

O'Neill is a guy who went in -- when you talk about baby banks -- went to Bank of Hawaii, which was struggling; I think "struggling" is a good way to put it. It was a struggling bank when he came in. He turned around that bank. It is a fantastic; I think one of the higher, or highest-quality banks out there now, and that's a lot of that thanks to Mike O'Neill.

Mike O'Neill is the chairman of Citigroup now. He helped bring in Mike Corbat, so you've got these bankers running this business now.

Rick: Bankers, running a bank.

Matt: Exactly.

Rick: Imagine that.

Matt: Right? Right?

This is as opposed to deal-makers running a bank, or investment bankers, or traders running a bank. This was happening, so now you've got bankers back here at Citigroup.

I think the story is still coalescing but a story's coming through, and it's this idea of Citigroup being a bank, being less a consumer bank, more a commercial bank, more a kind of bank that serves big Fortune 500 clients. As far as I know, it has relationships with like 95% of Fortune 500 companies, and you've got this broad geographic reach.

When you think about being a Procter & Gamble or a Coca-Cola, or something like that, who are the banks that you're going to reach out to? When you look at a Citigroup and think about, "Well, they're on the ground, all over the world. They have this gigantic emerging market presence."

When you think about the S&P 500, Fortune 500 companies that are so focused on getting into those emerging markets where there's so much growth happening, when you have a bank that's on the ground there and doing a lot of business there, I think that's potentially a big opportunity for Citigroup going forward, and a big part of the story.

It's a long way of saying yes; Wells Fargo today, and Wells Fargo a decade back and a decade forward, great business. The reason to think of potentially investing in Citigroup and Bank of America as opposed to Wells Fargo isn't just a, "Eh, it's cheaper." But it's a, "They're cheaper, but they're also building better businesses today than they were before."