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Oct. 18, 2019, 1:24 p.m. EDT

Bank of America may be as profitable as J.P. Morgan in two years, analyst says

James Shanahan of Edward Jones argues that Bank of America’s shares are undervalued

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By Philip van Doorn, MarketWatch


Bloomberg

J.P. Morgan Chase has a reputation as the “best in class” among the Big Four U.S. banks, but Bank of America might be a better investment if you hold the stock for the next few years, according to Edward Jones analyst James Shanahan.

In an interview Oct. 17, Shanahan pointed to Bank of America’s /zigman2/quotes/200894270/composite BAC -0.91%  record $7.6 billion in share buybacks in the third quarter and massive investment in technology as catalysts for improving earnings performance and growing market share. (Buybacks lower the share count to boost earnings per share. They also reduce a bank’s excess capital, which boosts returns on equity.)

Shanahan said better technology will enable the four largest U.S. banks to continue taking market share from smaller competitors.

“The biggest banks are generating so much cash flow that they have the ability to make large and substantial investments in technology and leverage those investments into larger retail deposit footprints,” he said.

The Big Four are investing $10 billion to $12 billion a year in new technology, Shanahan estimated. This will “create a tech infrastructure smaller banks will not be able to compete with and will never catch up to,” he said.

Shanahan expects the Big Four to leverage their growing deposit relationships “across services as they take more share over time.”

A valuation play

At its current level of profitability, Bank of America’s shares should be trading higher, Shanahan argues. When discussing longer-term prospects, he said: "They are kind of catching up, but within a couple of years they should reach a level of profitability similar to J.P. Morgan Chase /zigman2/quotes/205971034/composite JPM -0.53% .”

That may seem a tall order. Let’s take a look at valuations for the Big Four, which also include Citigroup /zigman2/quotes/207741460/composite C -1.55%  and Wells Fargo   /zigman2/quotes/203790192/composite WFC -1.72%

Bank Ticker Closing price - Oct. 16 Tangible book value - Sept. 30 Consensus EPS estimate - next 12 months Price/ tangible book value Forward price/ earnings
Bank of America Corp. /zigman2/quotes/200894270/composite BAC $30.17 $19.26 $2.70 1.6 11.2
J.P. Morgan Chase & Co. /zigman2/quotes/205971034/composite JPM $119.68 $60.48 $10.13 2.0 11.8
Citigroup Inc. /zigman2/quotes/207741460/composite C $69.50 $69.03 $7.53 1.0 9.2
Wells Fargo & Co. /zigman2/quotes/203790192/composite WFC $49.59 $33.84 $4.63 1.5 10.7
Sources: FactSet, Edward Jones (tangible book values)

So Bank of America trades higher than Citigroup /zigman2/quotes/207741460/composite C -1.55%  and Wells Fargo /zigman2/quotes/203790192/composite WFC -1.72% , but significantly lower, by both measures, than J.P. Morgan.

When Shanahan spoke of “profitability,” he specifically meant return on tangible common equity (ROTCE), which he said is “the measure we pay most attention to.” For banks, the denominator of that ratio is total equity, less preferred equity, goodwill and intangible assets, including loan-servicing rights.

Here are estimated 2019 returns on tangible equity for the Big Four, based on actual results for the first three quarters and Edward Jones’ fourth-quarter estimates:

Bank Ticker Estimated ROTCE - 2019
Bank of America Corp. BAC 15.9%
J.P. Morgan Chase & Co. JPM 19.1%
Citigroup Inc. C 12.0%
Wells Fargo & Co. WFC 13.9%
Source: Edward Jones

Bank of America’s estimated return on tangible equity still trails J.P. Morgan’s by a wide margin, but it is also significantly higher than the estimates for Citigroup and Wells Fargo.

/zigman2/quotes/200894270/composite
US : U.S.: NYSE
$ 32.79
-0.30 -0.91%
Volume: 49.00M
Nov. 13, 2019 6:30p
P/E Ratio
12.13
Dividend Yield
2.20%
Market Cap
$298.46 billion
Rev. per Employee
$543,289
loading...
/zigman2/quotes/205971034/composite
US : U.S.: NYSE
$ 128.48
-0.68 -0.53%
Volume: 8.10M
Nov. 13, 2019 6:30p
P/E Ratio
12.68
Dividend Yield
2.80%
Market Cap
$407.49 billion
Rev. per Employee
$497,647
loading...
/zigman2/quotes/207741460/composite
US : U.S.: NYSE
$ 73.91
-1.16 -1.55%
Volume: 14.06M
Nov. 13, 2019 6:30p
P/E Ratio
9.81
Dividend Yield
2.76%
Market Cap
$165.05 billion
Rev. per Employee
$479,167
loading...
/zigman2/quotes/203790192/composite
US : U.S.: NYSE
$ 53.29
-0.93 -1.72%
Volume: 16.94M
Nov. 13, 2019 6:30p
P/E Ratio
11.50
Dividend Yield
3.83%
Market Cap
$228.60 billion
Rev. per Employee
$392,114
loading...
/zigman2/quotes/200894270/composite
US : U.S.: NYSE
$ 32.79
-0.30 -0.91%
Volume: 49.00M
Nov. 13, 2019 6:30p
P/E Ratio
12.13
Dividend Yield
2.20%
Market Cap
$298.46 billion
Rev. per Employee
$543,289
loading...
/zigman2/quotes/205971034/composite
US : U.S.: NYSE
$ 128.48
-0.68 -0.53%
Volume: 8.10M
Nov. 13, 2019 6:30p
P/E Ratio
12.68
Dividend Yield
2.80%
Market Cap
$407.49 billion
Rev. per Employee
$497,647
loading...
/zigman2/quotes/207741460/composite
US : U.S.: NYSE
$ 73.91
-1.16 -1.55%
Volume: 14.06M
Nov. 13, 2019 6:30p
P/E Ratio
9.81
Dividend Yield
2.76%
Market Cap
$165.05 billion
Rev. per Employee
$479,167
loading...
/zigman2/quotes/203790192/composite
US : U.S.: NYSE
$ 53.29
-0.93 -1.72%
Volume: 16.94M
Nov. 13, 2019 6:30p
P/E Ratio
11.50
Dividend Yield
3.83%
Market Cap
$228.60 billion
Rev. per Employee
$392,114
loading...
/zigman2/quotes/207741460/composite
US : U.S.: NYSE
$ 73.91
-1.16 -1.55%
Volume: 14.06M
Nov. 13, 2019 6:30p
P/E Ratio
9.81
Dividend Yield
2.76%
Market Cap
$165.05 billion
Rev. per Employee
$479,167
loading...
/zigman2/quotes/203790192/composite
US : U.S.: NYSE
$ 53.29
-0.93 -1.72%
Volume: 16.94M
Nov. 13, 2019 6:30p
P/E Ratio
11.50
Dividend Yield
3.83%
Market Cap
$228.60 billion
Rev. per Employee
$392,114
loading...
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