There are more bad bank stocks than there are good ones. But even among the bad ones, some are worse than others. Three that come to mind immediately are Bank of America, Citigroup, and Zions Bancorporation.
To be clear, I'm not suggesting that any of these stocks is on the verge of plummeting. If anything, the smart money seems to be betting that they'll increase at a decent rate over the next few years.
As a case in point, Warren Buffett, the world's most accomplished investor, has staked $5 billion of Berkshire Hathaway's cash on the success of Bank of America -- though, to be clear, the position consists of warrants and preferred shares, which is substantively different than holding common stock.
But Buffett's investment aside, over the past decade, not one of these banks has performed in a way that would instill confidence that their long-term prospects are anything but bleak compared with the broader market.
In the lead-up to the crisis, all three lowered their credit standards and underwrote dubious loans and asset-backed securities. And in Bank of America's case, it purchased Countrywide Financial, which we came to learn was the biggest and most corrupt mortgage originator in the country at the time.
When things later took a turn for the worse, these banks were forced to dilute their shareholders to unconscionable degrees. Citigroup's outstanding share count increased fivefold, Bank of America's more than doubled, and Zions wasn't far behind with an 84% increase.
Of course, there were plenty of others that followed suit. For instance, Ohio-based Huntington Bancshares saw its share count go from 235 million in 2007 up to more than 800 million today, and Alabama's Regions Financial issued approximately 700 million new shares over the past few years and thereby doubled its units outstanding.
But the difference is that Citigroup, Bank of America, and Zions are far behind when it comes to cleaning up their acts. Just this year, all three of them ran into problems on the annual Federal Reserve-administered CCAR exam, which determines whether the nation's largest banks can raise their dividends or buy back stock.
Citigroup and Zions were outright rejected, while Bank of America was later asked to resubmit its proposal after belatedly disclosing an accounting error stemming from its 2008 acquisition of Merrill Lynch. As a result, the North Carolina-based bank had to tailor its request by abandoning plans to repurchase $4 billion in common stock.
Additionally, all three of these banks continue to exhibit dismal operating statistics. In 2013, Bank of America and Zions had the worst efficiency ratios of any big bank, clocking in at 78.4 and 77.1, respectively. This means that only a little more than 20% of their net revenue could be used to pay taxes, distribute to shareholders, or grow book value.
And the problems weren't isolated to the bottom halves of their income statements, as all three of these banks generated less revenue relative to total assets than the average of their peer group.
The net result is that there's little reason aside from sheer speculation to be optimistic about the future of these banks.
I could be wrong. And for what it's worth, I hope I am. But I nevertheless can't understand why an investor would entrust his or her hard-earned capital to banks like these when there are many better options available in the market today.
John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo and owns shares of Bank of America, Citigroup, Huntington Bancshares, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.