Thursday, April 17, 2014

Our Biggest Banks Are A Mixed Bag

Our March post on the Fed stress tests on our "Four Horsemen" of banking seems like a good background for discussing the first quarter's results for Bank of America, JP Morgan Chase, Wells Fargo and Citigroup.

Bank of America had a lackluster quarter with the biggest surprise being its $6 billion in litigation expense five years into the purported economic recovery.  Analysts concluded that litigation expense was impossible to model, especially given the Catch-22 of the company's not wanting to tip its hand to the plaintiff's bar about how much goodies the legal reserve cookie jar held.  The acquisition of Countrywide Financial continues to plague this company, and no one is in jail.

The return on equity was a paltry 4.6%.  Yet, the P/E is the highest among JPM, BAC, and WFC.  Merrill Lynch may eventually be passed for the most AUM by Morgan Stanley Wealth Management, and it's unclear what synergy the Thundering Herd gets from association with Bank of America.

We've said for a long time that the biggest problem at JP Morgan Chase was not size but complexity.  We characterized this leviathan as "Too Complex To Manage," even for the loquacious, highly numerate, quick witted Jamie Dimon, as the London Whale episode pointed out.  His lieutenants, through all the musical chairs, have not served him well. As time has gone on, our faith in the TCTM thesis is stronger than ever, no matter what any cyclical improvement over trashy quarters might suggest.

The number driven, traditional banker's philosophy that Jamie Dimon brought to Bank One was one of the reasons for its success, plus it was already a well established, high quality name before he became CEO. JP Morgan Chase is a completely different animal, crafted by putting together one of the premier investment banks in the history of American finance with a badly managed Chase Manhattan, a well managed Bank One and many other acquisitions which all together result in the beast that is now a collection of very large fiefdoms.

The management should clean up the portfolio and structure before multiple regulators so something more damaging to shareholders. Average loan balances fell across all market segments, and mortgage originations fell by 68% over the TTM.

Wells Fargo's performance was the best overall in the quarter with its 17th consecutive quarter of earnings growth (+14%) and its dividend increase of 17%, without any surprise in its capital plans with the Fed. It continued with its share repurchases as well.

Deposits grew by 8%, a very healthy number in this environment. Net charge offs were 0.41% of average loans in the quarter and they were down 42% year-over-year.  ROA was a healthy 1.57%, up 76 basis points, and ROE was 14.35%.

The company has quietly moved its institutional and high net worth asset management businesses upstream to customers with significantly higher minimums, and in some areas like stable value the Galliard Capital subsidiary will end the quarter with assets over $100 billion.

The one thing missing from WFC which JPM and C have is significant international exposure.

Which brings us to Citi.  This is still the biggest rabbit warren. It is a structurally messy, grossly under managed managed bank, but the problem didn't originate with Vikram Pandit or even with Charles Prince.  It goes right back to the Sandy Weill-John Reed fractured relationship over decades ago.  Citi, however, has the potentially most valuable future franchises in Asia and Latin America.  It must escape its legacy of Citi Holdings and somehow craft a rational organizational structure and a responsible culture, which it sorely lacks.  It has no Jamie Dimon or John Stumpf.  It could use some activist investors to help whip itself into shape.

No comments: