Banks Recap: Sorting the Good, the Bad and the Ugly


The majority of the top U.S. banks have now reported earnings, and most were able to beat earnings for the fourth quarter. However, the banks should be grateful for the disappointing third-quarter results that came a few months earlier.

Banks If you recall, Q3 was when most major banks missed estimates and reported mild results. In fact, the Q4 beats were largely a direct consequence of investors’ lowering the bar after Q3 results.

And yet the overall sense is that quite a number of banks are clunkers, barely moving ahead, while a select few are quick, lean and ready to race forward.

The question is, how do you sort the buys from the sells? Don’t worry — we’ve done the hard work for you. Here are the banks worth keeping and the ones worthy of the garbage heap.

JPM Stock Is a Clunker: Ditch It

JPM stock JPMorgan Chase NYSE:JPM JPM stockWe had high hopes for JPMorgan Chase & Co. (JPM) but the results didn’t exactly match up. The bank beat earnings expectations for the quarter, hitting $1.32 per share vs. the expected $1.25 by Reuter’s survey. The beat came thanks to cost-cutting efforts that were supposed to bring back a higher level of profitability.

But looked at in the context of Q3’s disappointing results, the bank’s cost cutting measures simply didn’t progress fast enough. This leads us to conclude that the bank’s progress towards higher profitability is uneven at best. And at worst, it is highly unpredictable.

JPMorgan’s complicated business model and structure weighs on JPM stock. For example, net interest margin (NIM) for Q4, a key barometer for a bank’s cost basis, was moved up to 2.23%. Theoretically, that’s a good sign. The bank’s consumer banking segment was, in fact, performing relatively well, with revenue up 2% year-over-year.

But the strength in consumer banking was countered by weakness in other segments. Segments such as Asset Management and Investment Banking saw revenues plunge on a year-over-year basis. With these segments still on shaky footing, it would be wise to dump JPM stock until the environment changes.

WFC Stock Is Doing the Right Things: Keep It

wells fargo earnings wfc stockWells Fargo (WFC), unlike its peer JPMorgan & Co., has kept its business model simple. It focuses primarily on consumer and commercial credit and deposits, and that makes WFC Stock a keeper.

Wells Fargo, like many peers, beat estimates with a net income of $23 billion for 2015. On top of that in 2015 the bank’s loan book grew by an impressive 7% year-over-year.

But what really catches your attention isn’t WFC profits, it’s the bank’s lower losses.

WFC stock has a high exposure to the Oil and Gas sectors. As such, it’s natural that non-performing assets would grow. But the bank’s non-performing assets actually fell in Q4 by roughly $500 million. Why? Because non-performing loans from the oil sector were offset, balanced out by lower provisions in consumer, real estate and commercial loans.

This just emphasizes how well Wells Fargo is running its smart-yet-simple business model. WFC management kept its focus on credit while simultaneously diversifying to avert or minimize loss.

Moreover, the bank is constantly raising its deposit base as well as its loan business. Wells Fargo’s NIM is 2.92%, a slight decline that is likely due to the oil glut. However, the bank’s NIM is still higher than most of its peers. Naturally, with this strong business model, return on assets is higher than peers, as well, with ROA for 2015 at 12.23%.

The verdict is clear: WFC Stock is a keeper.

C Stock Is Lagging: Dump It

citigroup-c-stockCitigroup (C) beat analysts’ expectations, with net income hitting $17.2 billion for 2015 and net interest margin at 2.92%. This rather fair result was driven by lower legal costs and cost restructuring that enabled the bank to save roughly $12 billion in annual expenses. Unfortunately, that’s where the good news ends for C Stock.

Granted, C Stock did improve on an annual basis. However, its Q4 performance was weak, with revenue falling $250 million quarter-over-quarter. Moreover, C Stock’s ROE is at 9.2%, which is significantly lower than other peer banks. Worst still, Citibank’s lending business was especially weak, with its loan book falling by 4% YoY.

Overall, despite the improvement in its cost basis, Citibank is still a lagger and should be ditched. The sharp cost reduction isn’t a reflection of the bank’s current efficiency. Rather, it’s a reflection of how inefficient it was before. Citibank is finding it difficult to grow its business and maintain market share in the loan business. That means C stock is still set to lag other bank stocks.

USB Stock Is the Best Bank Stock Around: Keep It

USBancorp185United Bank Corp. (USB) is just the kind of bank stock you want to own. Revenues for the year hit $5.9 billion, more or less unchanged from 2015. Yet the bank has a solid yet simplified business model based on traditional lending for consumers and businesses. This change provided United Bank Corp with unmatched efficiency — a great boon for USB stock.

USB’s NIM is at 3.06% and has been holding stable since Q3. That, of course, is much higher than its peers. ROE for is an impressive 14% which, as you may have guessed, is far above peer banks.

USB’s loan book grew an impressive 4.2% for 2015, and deposits grew by 6.9%. Those figures are an indication that the bank’s core business is doing well. With the bank using its strong capital to return a staggering 72% of its earnings through dividends, USB is a serious cash cow.

Of course, our conclusion is a no-brainer: USB Stock is a keeper.

BAC Stock Is on the Way to Safety: Keep It

bacBank of America (BAC) beat analysts’ expectations, posting earnings of 28 cents per share in Q4. Revenues fell slightly on an annual basis (down 2%), but net income grew at a healthy clip, rising from $4.8 billion in 2014 to $15.9 billion in 2015. That number is largely a result of the BAC management’s ruthless spending cuts.

BAC cut roughly 10,000 employees across its various banking units. That cost cutting has allowed ROE to jump from 2.1% in 2014 to the current 9.1%. While that’s still below the company’s peers, it shows that BAC is certainly closing the gap.

The bottom line is that cost cutting is yielding strong results for BAC stock. And with CEO Brian Moynihan at the helm, BAC deserves the benefit of the doubt.

As of this writing, Lior Alkalay did not hold a position in any of the aforementioned securities.

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