Banks have been out of favor for a long time. But as the economy recovers in a post-pandemic world, they’re likely to lead the way. And these two big bank stocks are dirt-cheap.
We never forget our first real job. For me it was the First National Bank of Boston, the second-oldest bank in the country, founded in 1784. Hired by their Asia-Pacific group, I first went through an executive training program that was really a crash course on corporate banking basics.
Drilled by crusty veterans on how to read a balance sheet, crunch cash flows, and evaluate loan collateral, the overriding goal was to determine the creditworthiness of the borrower and have a wide margin for error. The message was clear – get the money back, or else.
I’ll bet the big banks don’t have these training programs anymore. Corporate lending is a much smaller piece of their “financial super-market model” that has reached levels of baffling complexity.
This management challenge has also led to landmines exploding, such as Citigroup’s recent error in wiring funds, and another investigation into how effective the big banks are at stopping money laundering. These issues and lower interest rates have pushed down big bank stocks, which are trading pretty close to their March 2020 lows.
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Big tech companies are the high flyers these days. If you add the market capitalization weightings of Amazon (AMZN), Alphabet (GOOG), and Facebook (FB) to the information technology sector, its weighting balloons to roughly 35% of the broader S&P 500 index, dwarfing even its early-2000 peak weighting.
One sector that’s been completely left behind is banking and finance. With a weak economy, struggling companies, and interest rates low, why would anyone want to invest in a bank stock?
I believe that this is exactly the time to scoop up a couple of big bank stocks because they aren’t going anywhere, they will rebound with the real economy, they provide solid dividend yields, and, perhaps most importantly, they are on sale.
2 Big Bank Stocks to Buy Now
Two big bank stocks I would look at right now are JPMorgan Chase (JPM) and Citigroup (C).
Let’s start with Citigroup, America’s third-largest bank, with close to $2 trillion in total assets and more than $650 billion in deposits, which have risen 21% over the last year, ending June 30.
Citi’s stock is at just over 43 a share, barely more than half of where it was nine months ago. This is roughly 50% of tangible book value with the bonus of a 4.7% current dividend yield.
Earlier this month, the bank’s board selected Jane Fraser to become its next chief executive officer and she surely will announce her agenda for the bank soon. Citigroup CFO Mark Mason recently said at a recent conference that the bank is spending $1 billion this year alone to update its risk and control systems.
You might also go with JPMorgan Chase, America’s largest bank by assets and market value. It is also the most profitable big bank with $1.7 trillion in deposits, up 30% in the year ended in June. In 2019 it delivered a 15% return on equity, which has pulled back to 9.5% with the pandemic economy, but it has a higher return on assets than Citigroup.
JPM stock trades in the mid-90s per share, putting it about 20% above its March lows and is priced at 1.2 times book value, significantly above Citigroup. That is the price you pay for higher quality.
Which big bank stock will do better going forward is anyone’s guess, which is why you may wish to put both of these ideas in your saddlebag. My hunch is that Citi stock may do better as its new CEO takes the helm with an ambitious blueprint to turn things around. Citi also has more of an international presence and is particularly strong in Asia.
Looking forward, you will likely come out ahead and on days when the big tech stocks stumble. When that happens, you’ll remember how smart it was to add a couple of rather boring bank stocks to your portfolio.