The Customer Is Always Right (When It Comes To Banks)

by Louis Navellier | December 13, 2012 8:00 am

The Customer Is Always Right (When It Comes To Banks)

Tuesday the folks behind the American Customer Satisfaction Index (ACSI) released its 2012 customer satisfaction data for a number of big banks. According to the ACSI, the overall banking sector saw customer satisfaction climb 2.7%. Considering that customer satisfaction data oftentimes indicates trends in consumer spending, is it time to revisit my longtime strategy to avoid banking stocks?

Today I’ll answer this question by digging into the latest customer satisfaction and fundamental data backing up each of the nation’s largest banks.

Ticker
Company
ACSI
Score
Fundamental Grade Quantitative Grade Total
Score
BAC[1] Bank of America 66 D A B[2]

Let’s start with Bank of America (NYSE:BAC[1]). In 2012, customer satisfaction for BoA slipped to 66—the lowest reading in over a decade! Even so, the stock has gone gangbusters this year, gaining 91%. And this stock receives a B-rating.

But as I mentioned in a recent Stock of the Day entry, buyer beware: this stock’s buying pressure is what makes it a B-rated buy; if you look into the companies’ fundamentals, you’ll see that Bank of America fails in terms of sales and earnings growth as well as return on equity. So in this case it seems like the company’s marred reputation has weighed on sales and earnings.

Ticker
Company ACSI
Score
Fundamental Grade Quantitative Grade Total
Score
C[3] Citigroup 70 D C C[4]

As for Citigroup (NSYE:C[3]), customer satisfaction fell 4.1% compared with last year to a reading of 70. As in the case with Bank of America, Citigroup has hit rock bottom in terms of sales growth and earnings growth. It’s a small wonder that the analyst community expects sales to fall 9% for 2012 and earnings to climb just 11%—less than a third of the industry average.

Ticker
Company
ACSI
Score
Fundamental Grade Quantitative Grade Total
Score
JPM[5] JPMorgan 74 B C C[6]

JPMorgan Chase (NYSE:JPM[5]) scored the highest in terms of customer satisfaction—74—a 5.7% jump over last year. Similarly, JPM does much better in terms of its Fundamental Grade, with decent ratings for six of the eight fundamental metrics I graded this stock on (including operating margin growth, earnings growth, analyst earnings revisions and cash flow.

This company still needs to improve its sales growth but given that analysts expect the company to post 10.4% sales growth this quarter, it’s in better shape than the first two. However, institutional buying pressure is still weak, so I’m keeping this stock at a C-rated hold until it firms up.

Ticker
Company
ACSI
Score
Fundamental Grade Quantitative Grade Total
Score
WFC Wells Fargo & Co. 71 B C C[7]

Finally, we have Wells Fargo (NYSE:WFC[8]), which sustained a 2.7% drop in customer satisfaction to a reading of 71. This is the first time in three years that Wells Fargo hasn’t been No. 1 in terms of customer satisfaction. Wells Fargo is no stranger to lackluster sales growth, so it receives a C on that metric, but it does pull off good grades for earnings growth and return on equity.

Just as with JPM, lackluster buying pressure is what keeps this stock down at a hold but it is clear that there has been some improvement on the company’s financial statements.

If you remember back to the beginning of this post, I mentioned that customer satisfaction rose for the overall banking sector. How could that be if three of the nation’s largest banks sustained drops in satisfaction? Well, that’s because the sector’s gains were largely driven by smaller institutions and regional banks.

And when you think about it, this makes since, because smaller banks tend to be more lenient with overdraft fees and more transparent with their policies. Considering that they received an average rating of 79 this year, it’s clear that there is a shift in consumer sentiment in favor of smaller banks.

So to conclude: No, I’m not going to change my stance on staying away from the big banks. As an ex-banking analyst, I had a hunch that it would take years for these companies to recover from the financial crisis, and unfortunately I have been right so far. If you really wanted to explore opportunities in the Financial sector, I’d recommend sticking with Consumer Finance stocks.

Endnotes:
  1. BAC: http://studio-5.financialcontent.com/investplace/quote?Symbol=BAC
  2. B: http://navelliergrowth.investorplace.com/portfolio-grader/stock-report.html?t=BAC
  3. C: http://studio-5.financialcontent.com/investplace/quote?Symbol=C
  4. C: http://navelliergrowth.investorplace.com/portfolio-grader/stock-report.html?t=C
  5. JPM: http://studio-5.financialcontent.com/investplace/quote?Symbol=JPM
  6. C: http://navelliergrowth.investorplace.com/portfolio-grader/stock-report.html?t=jpm
  7. C: http://navelliergrowth.investorplace.com/portfolio-grader/stock-report.html?t=WFC
  8. WFC: http://studio-5.financialcontent.com/investplace/quote?Symbol=WFC

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