There's been a reshuffling of rank among the 10 biggest banks in America. During the fourth quarter of 2015, Wells Fargo (NYSE:WFC) eclipsed Citigroup (NYSE:C) to become the nation's third largest bank by assets. Also somewhat surprising was the fact that Bank of America's (NYSE:BAC) assets grew on a year-over-year basis while JPMorgan Chase's (NYSE:JPM) shrank.
Wells Fargo overtakes Citigroup
Wells Fargo's ascent to the No. 3 position began when Citigroup reported a $19 billion loss in 2008. The loss stemmed from imprudent and ill-timed bets on leveraged loans and subprime mortgages. One month later Citigroup added insult to injury by recording a $9.9 billion goodwill impairment related to its 2007 purchase of Nikko Asset Management, the third largest fund manager in Japan.
Wells Fargo, by contrast, entered the financial crisis after consciously and conspicuously avoiding the most toxic types of assets that pushed many of its peers to the brink of failure or beyond. As its then-chairman Richard Kovacevich and CEO John Stumpf wrote six months before the crisis fully materialized:
Our company maintained its credit risk discipline reasonably well during the years of excessive risk taking in our industry. [...] Because of our prudent lending to customers with less than prime credit and our decision not to make negative amortization loans, we estimate we lost between two and four percent in mortgage origination market share from 2004 to 2006. That translates into losing between $60 billion and $120 billion in mortgage originations in 2006 alone. We're glad we did.
As a result of their divergent paths, Citigroup has spent the last eight years selling off assets, losing market share, and struggling to satisfy regulators during the annual stress tests. Meanwhile, Wells Fargo has more than doubled in size, built out a nationwide branch network, reported a long streak of record profits, and has been rewarded with the highest market capitalization in the bank industry.
Bank of America's assets grow while JPMorgan Chase's shrink
Bank of America's assets have contracted consistently since the financial crisis. After peaking at nearly $2.5 trillion following its 2008 acquisitions of Countrywide Financial and Merrill Lynch, the North Carolina-based bank has shed toxic and noncore assets at a feverish pace. But this trend reversed last year. By the end of 2015, Bank of America's balance sheet held $2.14 trillion in assets, compared to $2.10 trillion at the end of 2014.
JPMorgan Chase, on the other hand, went in the opposite direction. The nation's biggest bank by assets has been working to slim down its balance sheet in order to reduce the amount of capital it must reserve against its assets. It made progress on this front last year. By offloading $200 billion in assets, JPMorgan Chase lowered the amount of capital it's required to hold from an additional 4.5 percentage points of risk-weighted assets above the standard regional bank to only 3.5 percentage points more.
John Maxfield owns shares of Bank of America. The Motley Fool owns shares of and recommends Wells Fargo. The Motley Fool has the following options: short March 2016 $52 puts on Wells Fargo. The Motley Fool recommends Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.