As a shareholder in Bank of America (NYSE:BAC) since late 2011, I'm a pretty happy camper to see my stock rise more than 200% in value. But my story may not be the same for other long-term shareholders.
Bank of America's many woes
Bank of America shares have lost more than 60% of their value in the last decade, scarred by the Great Recession, a housing bubble, a liquidity crisis, and the poorly timed purchase of Countrywide Financial. Furthermore, Bank of America has faced a mountain of litigation over its handling of mortgages during the housing crisis, resulting in a whopping $61.2 billion in legal settlement fees to date. That amount could have represented nearly $6 per share in added profit since the recession.
In addition to Bank of America's bottom line looking a bit cloudy, income investors have been negatively affected. As part of its bailout by the Federal Reserve, Bank of America was forced to slash its dividend to just $0.01 per quarter for more than five years starting in 2009. Even with the recent boost in its payout to $0.05 per quarter, BofA yields only a bit more than 1% annually.
Yet Bank of America appears ready to put its mortgage woes in the rearview mirror in 2015. Its dividend increase also provides tangible evidence that the company is sufficiently capitalized, and is generating enough profit, to begin rewarding shareholders more handsomely.
Wall Street expects Bank of America to earn $1.95 in EPS in 2017, equating to a forward P/E of just nine. To me, that's incredibly cheap and a reason why I continue to hang on to my shares.
Three banks even cheaper than Bank of America
Still, three banking giants are cheaper on a forward earnings basis than Bank of America. Let's take a quick look at these extremely inexpensive banks.
No. 1: JPMorgan Chase (NYSE:JPM)
Much of the banking sector has spent the years since the recession eliminating questionable mortgage practices and getting back to basics.
JPMorgan Chase has done a fantastic job of cutting costs, eliminating 5,500 jobs in 2013 and planning to cut in the neighborhood of 2,000 this year. These cuts, combined with slower branch expansion, have allowed the company to control its expenses and boost profitability in an interest rate environment that is not particularly conducive to bank growth.
Although JPMorgan's workforce is shrinking, its key metrics aren't. Average total deposits rose 8% in the third quarter from the year-ago period, to $492 billion, while client investment assets soared 16% to $207.8 billion. Additionally, its noninterest expense dropped 8% to $6.3 billion, year over year, primarily driven lower by fewer mortgage banking expenses.
Based on a side-by-side comparison, JPMorgan Chase has a trailing 12-month return on assets of 0.89% and a return on equity of 10.1%. Bank of America's ROA is just 0.25% and its ROE 2.2% over the trailing year. With Wall Street forecasting $7.36 in EPS by 2017, JPMorgan is valued at a mere eight times 2017's profit.
No. 2: Canadian Imperial Bank of Commerce (NYSE:CM)
Unlike their U.S. counterparts, Canadian banks survived the 2008-2009 downturn in decent shape. But they have recently come under fire from Wall Street for rising expenses. However, spiking costs might not be a problem in the long run for Canadian Imperial Bank of Commerce, or CIBC, as long as its customer-focused strategies continue to pay off.
The bank has focused intently on improving convenience for its client base, including by introducing eDeposit and offering a leading mobile banking platform in Canada. CIBC also recently announced a pilot program that will allow business clients to electronically deposit cash into their bank account while the cash is still on the business's premises. Same-day cash is a radical concept that could give CIBC an edge over its peers and drive deposit growth.
Similar to other large banks, most of CIBC's metrics are moving in the right direction. Its loan loss ratio is down to 38 basis points over the trailing 12-month period from 44 basis points a year ago, indicating that the credit quality of its loans is improving. Also, total deposits grew by $10.2 billion over the trailing 12 months.
Projected to earn $9.89 in EPS by 2016, CIBC is valued at roughly eight and a half times forward profit projections. To boot, it also carries a dividend yield of better than 4%.
No. 3: Citigroup (NYSE:C)
If any bank can truly sympathize with what Bank of America has gone through since 2009, it's Citigroup. This year alone it wrote down $360 million in profit related to operations fraud in Mexico and chopped another $600 million in profit off its books due to increased legal costs. In other words, Citigroup is having a hard time staying out of the spotlight for all the wrong reasons.
The good news is we're seeing a steady rebound in its bread-and-butter banking operations. Loan loss reserves fell 56 basis points in third-quarter 2014 from the prior-year period, to 2.6%, demonstrating slow improvement in the credit quality of its loan portfolio. Citigroup's global consumer banking operations also saw net income rise 26% year over year, driven by retail banking revenue in North America.
Citigroup, though, is showing its biggest promise in foreign markets. In 2013, CEO Michael Corbat identified roughly 20 countries that are expected to push Citigroup's growth higher going forward, including China, India, and Mexico. With Citigroup looking abroad for growth while trimming jobs and expenses in North America, we could begin to see real bottom-line progress as soon as next year.
Looking ahead, Citigroup is forecast to earn $6.54 in EPS in 2017. If Citi can hit this number it would be valued at just eight times its projected 2017 profit, a nice discount to Bank of America.
Regardless of whether you prefer Bank of America, these are three cheap banks that you'd be foolish not to add to your watchlist.
Sean Williams owns shares of Bank of America, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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