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Top Five US Banks: USB, JPM, WFC, C & BAC

This is a syndicated repost published with the permission of The Institutional Risk Analyst. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.

March 28, 2022 | Premium Service | In this edition of The Institutional Risk Analyst, we take a look at the top-five US commercial banks – JPMorganChase (JPM) at $3.7 trillion in total consolidated assets, Bank of America (BAC) at $3.1 trillion, Citigroup (C) at $2.2 trillion, Wells Fargo (WFC) at $1.9 trillion and falling and U.S. Bancorp (USB) at $573 billion. We exclude Goldman Sachs (GS), Morgan Stanley (MS) and Charles Schwab (SCHW) because these financial holding companies are focused primarily on investing rather than commercial banking. Do note, however, that SCHW is now the 7th largest BHC in the US and there are now five US banking groups in the $500 billion asset category.

As the GAAP adjustments to bank income due to COVID have ended in 2021, US depositories start 2022 with gross interest income that is $40 billion per quarter below levels of two years ago. Loan loss rates remain quite low by historical standards, but delinquency is rising as you’d expect after a bull market in lending. The big question for 2022: Will funding costs rise faster than asset returns as the Federal Open Market Committee shifts policy to tightening.

Source: FDIC

The chart below shows net losses for total loans and leases vs average assets, one of the most basic measures of bank credit quality. Note that Citi’s loss rate is more than 2x the other large banks and 3x the average for the 130 large banks in Peer Group 1. Loan loss rates still reflect the downward skew caused by QE and the low absolute level of interest rates.

Note that BAC has one of the highest levels of credit loss of the other large banks after Citi, a remarkable fact given the poor asset returns reported by the bank under CEO Brian Moynihan. While BAC is consistently among the most traded bank stocks in terms of volumes, its financial performance remains decidedly mediocre. WFC, on the other hand, had the lowest loss rate in Q4 2021.

Source: FFIEC

Once we consider the bank’s credit loss profile, the next and related question is how well the bank performs in the market in terms of originating or pricing loans acquired from correspondents. BAC, of note, has the lowest gross spread on loans and leases of the top five banks and also boasts the longest average duration on its $1 trillion loan book in excess of ten years.

Source: FFIEC

After loan losses and pricing, the next area of interest is funding costs. The cost of funds for US banks reached an all-time low in Q4 2021, with Peer Group 1 reaching 23 bps and JPM just 15bps. But the lowest funding costs among the top ten US banks was SCHW at just 8bp on the bank’s almost half trillion in core deposits related to its advisory business. The smaller banks in Peer Group 1 naturally pulled the average down, but Citi’s cost of funds was 2x the group at 39bps.

Source: FFIEC

When we consider credit expenses, loan pricing and funding costs, the result is net income vs average assets. All of these institutions have significant non-interest income as part of their business mix, but all depend upon interest income and the spread over funding to function as a business and pay returns to equity investors.

Source: FFIEC

In terms of net income, Citi is at the bottom of the group followed by BAC, WFC and Peer Group 1. JPM and USB are the best performers in the group. Notice that USB has been the top performer in the top five banks going back five years and maintained that position through COVID.

Why do investment managers prefer temples of mediocrity like BAC to USB? Because the former is bigger and a more liquid stock, and relatively cheap. But BAC is cheap for a reason, namely the weak management and lack of focus under CEO Brian Moynihan.

One way to compare the operating profiles of the top five banks is to look at the efficiency ratios calculated by the FFIEC. The table below shows the efficiency ratios for the top five banks and Peer Group 1. Notice that USB and JPM are at or near the unweighted peer average, which reflects the superior profitability of smaller banks, while the results for BAC, Citi and WFC are elevated.

Efficiency Ratio (%)

Source: FFIEC

Another interesting perspective on operating efficiency is available by comparing the assets per employee of the major banks. While BAC has the largest assets per employee, they have the worst financial results. USB, on the other hand, has the smallest assets per employee but the best operating results. Big is not better.

Assets per Employee ($)

Source: FFIEC


Street analysts have JPM’s revenue basically flat in 2022, but miraculously growing 6% in 2023. USB, by comparison, is estimated to see 10% revenue growth in the current year and up 12% in 2023, the best outlook for the group. The 12 Street analysts that follow BAC estimate single digit revenue growth this year and next, with earnings of $3.57 for 2022 and only $3.30 in 2023 for the Bank of Brian.

Citi is expect to do $10 per share in earning this year but only $7 next year, perhaps explaining why the bank is trading at 0.6x book value at the close on Friday. Revenue growth for Citi is modest given that the bank is in the midst of jettisoning poorly performing businesses. WFC, by comparison, is expected to see down revenue in 2022, with earnings declining from $4.80 per share this year and just $3.90 in 2023. Hardly a rousing recommendation.

The tail winds in 2023 are that credit costs are still subdued thanks to the FOMC’s que and funding costs remain near record lows. But with the prospect of a flat or even inverted Treasury yield curve in 2023 and beyond, banks may face a future that is as uncertain as the past few years have been assured. Funding costs could very well rise above the average yield on short-term securities held by many banks, adding to the pain already felt by the movement in interest rates.

Last year, large banks were swimming in a market with robust M&A activity, a good number of low quality IPOs and strong mortgage origination volumes. Now a good number of those IPOs are busted deals and the flow of new transactions is down significantly. The non-interest income line of the universal banks will be light this quarter.

Last March, banks were selling residential mortgage loans into GNMA 2 MBS, but today are more likely to be selling fewer loans into a 3% MBS or 3.5s. There are a number of banks and IMBs that are sitting on market losses on whole loan and MBS portfolios that were retained too long. The TBA market for convention and government MBS is shown below.

Source: Bloomberg

The war in Ukraine has closed Russia and also China to the global investment banking swarm, thus we look for disappointment in Q1 2023 earnings on that front. It is interesting to note that the Chinese government is showing concessionary signs on the question of audits for Chinese firms seeking to list in the US market.

With the on-the-run 10-year Treasury note trading on a 94 handle, the message is clearly higher interest rates and less new issue market activity as a result. Volumes in the residential mortgage market in the US will likely be down 60% in 2022 vs the record year before. All that said, valuations for the top five US banks are up slightly as Q1 2022 comes to an end. Notice that USB has the highest multiple of book value for the group as the quarter comes to an end.

Source: Yahoo Finance

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