This article is aimed at screening out three US money center banks which are trading below their intrinsic values and can provide investors with an upside. For this purpose, discount to book value is used as the primary criterion to determine whether the bank under consideration is undervalued or otherwise. The screening results show Citigroup Inc. (NYSE:C), JPMorgan Chase & Co.(NYSE:JPM) and PNC Financial Services (NYSE:PNC) to have satisfied the aforementioned criteria. Investors can expect an upside of 14.5%, 8.5% and 8% from Citigroup, JPM and PNC, respectively. The remaining of the investment thesis will touch upon each of the banking companies briefly.
The specific criteria are as follows:
- Each banking company must possess an average daily trading volume of over 500,000.
- Each banking company must trade at least 5% below its book value.
- For each of the banking companies under consideration, analysts must have a consensus mean buy recommendation.
Formed in 1998, Citigroup history dates back to the founding of Citibank in 1812. The bank has a vast global footprint, serving over 160 countries. This vast global presence, particularly in the emerging markets has become a primarily source of the bank’s future growth. The bank’s fourth quarter results remained shy of expectations on litigation expense and lower trading profits. Citigroup’s asset quality remained largely stable to improving during the quarter. The loan-to-deposit ratio remained at 58%, giving Citigroup enough margin and liquidity to expand its lending in the coming quarters. In addition, this banking giant has an opportunity to generate additional revenues from the freed up cash due to the new relaxed Basel conditions, as noted in a previous article.
Citigroup has an average trading volume of 23 million shares per day, which provides investors with enough liquidity. With regards to its book value, the stock is currently trading at 31% discount. Analysts covering the stock have a consensus outperform recommendation for Citigroup. This means, generally most of the analysts support my thesis that Citigroup will outperform most of its peers and provide better upside. Only 2 analysts recommend their investors sell Citigroup.
The largest bank by assets, JPMorgan reported its recent quarter’s results that were better than expected on strong performance in the Corporate and Investment Banking divisions. During the quarter, asset quality improved as non-performing assets declined 6% versus the linked quarter, while charge-offs declined 41% over the same time period. However, the liquidity position, represented by loan-to-deposit ratio deteriorated as the ratio increased from 158% to 168%