If you want to know why shares of JPMorgan Chase (JPM 0.70%) and Wells Fargo (WFC 1.92%) trade at higher valuations than Bank of America (BAC 0.53%) and Citigroup (C 0.04%), all you have to do is take a look at the chart below. It shows the growth in tangible book value per share of the nation's four biggest banks since 2010.
Wells Fargo leads the pack by a comfortable margin. Over the past five years, the tangible book value of its shares has doubled, going from $12.60 per share in 2010 all the way up to $25.21 per share by the end of last year, according to data from YCharts.com.
Wells Fargo's success can be traced to two factors. First, it sidestepped many of the pitfalls that cost Bank of America and Citigroup so dearly during and after the financial crisis. Second, though related, Wells Fargo's profitability has led its peer group of too-big-to-fail banks. Its return on assets last year was 1.32%, which was nearly twice that of Bank of America's.
JPMorgan Chase comes in second, with tangible book value growth of 75% since 2010. Its success stems similarly from the fact that it thrived as a result of the financial crisis as opposed to just surviving it, as was the case at Bank of America and Citigroup. To this end, JPMorgan Chase was able to exploit the mistakes of its peers by stepping in to rescue/acquire Bear Stearns and Washington Mutual for pennies on the dollar in 2008.
Bank of America and Citigroup, meanwhile, have struggled over the past five years to atone for their pre-crisis sins. Bank of America has incurred upwards of $200 billion in crisis-related costs stretching back to 2008. This has weighed heavily on its profitability and is one of the reasons that it still earns appreciably less than 1% on its assets, a standard industry benchmark. Its return on assets last year was only 0.74%.
Citigroup has faced similar travails. While it took a larger share of its lumps up front, recording a $28 billion loss in 2008, it has since focused on shrinking its operations around its core focuses on global consumer banking and serving institutional clients. To this end, it went into the crisis as the biggest bank in America and, most recently, was succeeded in third place by Wells Fargo.
These developments come through loud and clear in the growth of these banks' tangible book values per share since 2010. And given that tangible book value per share is the foundation of bank stock valuations, this goes a long way toward explaining why JPMorgan Chase and Wells Fargo trade for premiums to their respective tangible book values while Bank of America and Citigroup trade for discounts.