Big Banks Beg to Be Bought - Barron's (C, JPM, WFC, BAC)

Four of the biggest U.S. banks are starting to look more appealing, a Barron's article reported over the weekend. After a rocky week last week, particularly after repaying much of the TARP funds owed and having a weak offering for several securities, bank stocks look to normalize their EPS potential going in to 2010.

Of all the Big Four, J.P. Morgan (NYSE: JPM) has the best potential. The bank has suffered less than the others in terms of equity dilution, and has made some intelligent purchases at rock-bottom prices with the acquisition of Bear Stearns and Washington Mutual. Jamie Dimon, JPM CEO, also seeks to boost their dividend to $0.75 - $1.00 for 2010, up from $0.20 for 2009. JPM has been flat since the end of summer, at could go to $57 in 2010, an analyst at Sanford Bernstein says. The stock is currently trading at $40.95.

Citigroup (NYSE: C) is probably the riskiest member of the Big Four. It has a weaker near-term profit outlook. It focuses more on their global consumer and commercial banking while divesting about $600 billion in assets. After a decline in stock price following a massive $17 billion equity offering, the stock is still trading at about 6.6 FY12 estimated EPS. Barron’s believes that the stock could reach $5 in the next two years given that it was at $5.25 over the summer.

Citi was hurt by the offering as it was forced to sell stock at $3.15 last Wednesday. The U.S. Government would also not sell any of their 7.7 billion share interest, given that they paid $3.25 per share. This unwillingness to sell led to unwillingness for investors to buy given the large government stake.

Bank of America (NYSE: BAC) and Wells Fargo (NYSE: WFC) round out the Four. Both BAC and WFC trade for about 9x FY10 EPS estimates, and 6x normalized earnings. Wells is seen to produce earnings of $3.75 and Bank of America $2.75 for FY12. With a P/E ratio of 10x normalized profits, the two banks could soar 80% within two years.

BAC trades at 1.3x book value, J.P. Morgan at 1.6x, and Wells at 1.8x book value. These are historically low numbers, and below Canadian counterparts. Price-to-book value is a conservative measure, excluding such items as goodwill from acquisitions and other intangible assets.

Another option with banks is to play their preferred shares. For example, Citi’s Trust Preferred trades for about $19 and yields 8.5%. Other banks’ preferred shares fall into the 7 – 8% yield range.

Tier One common is a common equity gauge, with assets weighted by risk. BAC and JPM, and C have Tier One equity ratios of 8 – 9%, above the emergency regulatory standard of 8%. WFC on the other hand, based on the $12 billion equity deal that the bank did last week, sees a Tier One ratio of 6.2%. Low compared to peers, but okay based on its strong earnings power.

Another item, based on Federal regulatory rules that may come about to cut down on “predatory” practices, such as overdraft fees, would cut into profits. JPM said that they may sees annual revs fall by around $1 billion.

On the other hand, legislation for reduced loan-loss provisions will add to the bottom line. Currently set at about 5% of loans, any reduction would add significantly to yearly EPS payouts.

An advantage that the Big Four have is a portfolio with less exposure to commercial real estate. Compared to about 20% for regional banks, the Big Four have about 3% of their holdings in commercial.

Finally, JPM assets are up to $1.6 trillion, bolstered from the purchases of WaMu and Bear Stearns. Stock dilution for JPM is less, up only 17% to 4 billion shares.

Citi’s share count has ballooned from less than 5 billion shares to over 30 billion shares, while their assets are down 15%.

Wells Fargo has remained profitable through the financial meltdown because of good execution of cross-selling products. Berkshir Hathaway has also upped their stake to 300 million shares of WFC, knowing that the bigger banks should produce higher profits and greater EPS in the coming years.

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