This PDF shows the data I compiled for 4 banks, one relatively small bank and three other banks that most investors would describe as strong and well-run: Wells Fargo (WFC), US Bank (USB), and JPMorgan (JPM). Though this post has been modified to hide the identity of the relatively unknown bank, which I’ll be calling “Mystery Bank,” I thought a comparison between WFC, USB and JPM would still be valuable to those still reading the blog.
I know this is simply a relative comparison of four banks and not an analysis of each bank on an absolute basis, but I thought this might be a helpful exercise to help further acquaint myself with the relevant banking metrics. So heed this warning: this data is only the 2009 Q2 data, a mere snapshot – this is by no means a full and fair evaluation of any of the banks discussed.
So without further ado, here are my thoughts:
1) By far, WFC and USB had much better returns on their assets and equity than the other two banks. I also find it interesting that the smaller Mystery Bank had 50% better returns on equity and assets than JPM.
2) Out of the bunch, Mystery Bank seems to be acting more conservatively when it comes to credit loss provision to net charge-offs and it relatedly has a more generous earnings coverage of net loan charge-offs than the other three.
3) In regards to noncurrent loans to loans, Mystery Bank with a ratio of 1.97% is clearly better than the other three: USB with 3.75%, WFC with 5.22%, and JPM with 5.67%.
4) In regards to Tier 1 risk-based capital ratio, a measure of a bank’s financial strength from the FDIC’s point of view, Mystery Bank is clearly the best out of the three.
The FDIC describes a bank as “Well Capitalized” if the Total Risk-Based Capital Ratio equal to or greater than 10 percent, and Tier 1 Risk-Based Capital Ratio equal to or greater than 6 percent, and Tier 1 Leverage Capital Ratio equal to or greater than 5 percent. All four banks are “well capitalized,” but it seems that USB is not as well-capitalized as the other three banks.
(One question I would like to find an answer to is whether a bank can be capitalized too well and how a bank goes about finding and maintaining an appropriate capitalization level.)
5) Mystery Bank, WFC, and USB are all able to earn a yield approaching 5% on their assets while JPM is the clear laggard in this area trailing WFC by 80 basis points. However, WFC and JPM seem to be much better with their cost of funding their earning assets. So in the end, all four have fairly similar net interest margins, but WFC has the best net interest margin by about 50 basis points to the next closest bank in the group.
6) In regard to net loans and leases, Mystery Bank, WFC, and USB all have fairly similar percentages, but net loans and leases comprise only 36.5% of JPM’s assets (I guess this reflects the fact that JPM is still more an investment bank). The only thing that might worry me about any of these banks in this area (remember, speaking only in comparative terms) is that Mystery Bank has about 20% of its loans devoted to construction and commercial real estate. However, I don’t think this is something to worry about because the real problem banks and the banks that have failed are the ones that devoted upwards of 35 to 40% and beyond to construction and commercial real estate.
7) In trying to determine which of these banks might be the most undervalued in terms of share price, I think a quick and dirty way might be to figure out the price to tangible book value ratio. Here, we find that Mystery Bank is trading at its tangible book value, WFC and JPM are trading at about 2 times tangible book, and USB is trading at a high premium of 3.4 times tangible book.
Judging from just the above data for Q2’09, my gut reaction is that Mystery Bank might be the most undervalued and therefore might offer the greatest amount of safety and largest opportunity for price appreciation. Mystery Bank has a lower noncurrent loans ratio than all the others, seems to be better capitalized, has earned higher returns on equity and assets than JPM, and has a very good net interest margin considering that it definitely lacks the same efficiencies of scale as the other three banks in this comparison. Also, it appears that insiders hold a large percentage of outstanding shares, always a good sign.
So if we agree that Mystery Bank is just as good a bank as JPM or even slightly better based solely upon the metrics, and there are no unseen problems with Mystery Bank, it seems that Mystery Bank deserves to trade at a larger multiple of its tangible book value.
The biggest deterrent to purchasing shares of Mystery Bank is that its low trading volume. Despite this downside, I have read that unfollowed and illiquid stocks often have a greater potential to be undervalued and this could be to an investor’s advantage if they are confident in their analysis and have the fortitude to withstand market fluctuations.
Finally, I think WFC is potentially the second-most undervalued and definitely the strongest bank of the bunch in terms of earning potential.
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