Big US banks have come back strong in recent years. These companies litter the ticker feeds with both overly optimistic bull opinions and cripplingly pessimistic bear opinions. Headlines aside, how are YOU supposed to decide if a big US bank is right for your portfolio? Whether you looking to diversify your portfolio by adding a company from the financial sector or seeking potential income, growth, or speculative positions, the Big Banks present investment opportunities for a wide array of retail investors.
When it comes down to deciding on which of the big 4 US banks, Wells Fargo & Co (NYSE:WFC), JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc. (NYSE:C), and Bank of America Corp (NYSE:BAC), is the company you are looking for it is important to analyze industry specific metrics. I am not saying that you need to throw the basic fundamental valuation factors, such as PE, EPS, and Book Value/per share out the door. I am simply saying that it is very important, especially if you decide to take on speculative position, to understand some key banking industry metrics.
The metrics we will be evaluating each of these four banks on will be loan growth, deposit growth, Loan to Deposit ratio (LTD), and efficiency ratio. Loan growth and deposit growth are important as these two factors influence bank revenue heavily as banks generating revenue by loaning out your deposits. The LTD ratio is crucial as it shows how liquid the bank is. Too high a LTD, the bank may not be liquid enough to meet fund requirements, too low, and the bank may not be maximizing its earning potential. And finally the efficiency ratio, which is the percentage of noninterest expenses in relation to revenue. This ratio demonstrates how “efficient” (GET IT!) a bank is at turning its resources into revenue.
Without further ado, let us dive in see how well these banks perform.
Wells Fargo & Co (NYSE:WFC) seemed to be a bright spot in the “bottomless well” that is big banks. The 150-year-old company currently trades at very attract 11.14 PE multiple with $3.36 (ttm) EPS and a cushy 2.70% dividend yield. In terms of our banking metrics, Wells Fargo & Co (NYSE:WFC) sports an efficiency ratio of 59%, LTD ratio of 82%, and loan and deposit growth at 2.4% and 8.4% respectively. Growth in both deposits and loans generated is a very positive sign as it demonstrates that Wells Fargo & Co (NYSE:WFC) is successful at attracting customers while its 59% efficiency ratio shows it has room for improvement in terms of generating revenue from these customers.