As Loans Shrink, Which Banks Are Winning?

by Alex Dumortier - July 28, 2009 - 0 comments

Last week, an audit by the TARP program's government watchdog suggested
that a wide majority (83%) of banks that have received TARP investments
had, in fact, put some of the funds to work by lending them out. That
may well be true, but recently released second-quarter results show
that the amount of total loans at the largest banks -- all TARP
recipients -- fell during the period:

<p>Last week, an audit by the TARP program's government watchdog suggested
that a wide majority (83%) of banks that have received TARP investments
had, in fact, put some of the funds to work by lending them out. That
may well be true, but recently released second-quarter results show
that the amount of total loans at the largest banks -- all TARP
recipients -- fell during the period:</p>

Bank	Quarter-on-Quarter Loan Growth (Q2 2009/Q1 2009)	Year-on-Year Loan Growth (Q2 2009/Q2 2008)
US Bancorp (NYSE: USB)	(1.1%)	+9.9%
Citigroup (NYSE: C)	(2.4%)	(14.1%)
Wells Fargo (NYSE: WFC)	(2.6%)	Not comparable due to Wachovia acquisition.
Bank of America (NYSE: BAC)	(3.6%)	Not comparable due to Countrywide acquisition.
PNC Financial (NYSE: PNC)	(3.7%)	Not comparable due to National City acquisition.
JPMorgan Chase (NYSE: JPM)	(3.9%)	Not comparable due to Washington Mutual acquisition.
Total (6 Banks)	(3.1%)	N/A

Source: Company documents.

Furthermore, much of the new loan volume in the quarter owed either
to mortgage refinancings or renewals of existing credit lines to
businesses.

Sorting the winners from the losers

The
table above suggests that Citigroup, U.S. Bancorp, and Wells Fargo
gained market share during the quarter, while Bank of America, JPMorgan
Chase, and PNC Financial lost ground. In that regard, US Bancorp looks
particularly impressive, clocking up year-on-year loan growth of nearly
10%. But what price must investors pay for performance? The following table contains some clues:

Company Name	Price/Earnings (estimated FY2010 earnings)	Price/Book Value	Price/Tangible Book Value
US Bancorp	13.4	1.67	3.36
Wells Fargo	13.4	1.31	2.6
JPMorgan Chase	12.6	1.02	1.89
PNC Financial	11.8	0.819	2.38
Bank of America	12.6	0.482	1.56
Citigroup	20.1	0.193	0.423

Source: Capital IQ, a division of Standard & Poor's.

Of the three "winners" I referred to earlier, I certainly prefer
Wells Fargo and US Bancorp; they're simply better-run organizations
than Citigroup, which is still a basket case.
Apparently, I'm not alone -- both are at the top (read: "expensive")
end of this group, whether it be in terms of price-to-earnings,
price-to-book value, or price-to-tangible book value.

My top three

All the same, it looks like paying up is worthwhile in this case; I think Wells and US Bancorp offer good prospects of outperforming their peers
-- and the broader market -- on a risk-adjusted basis over the next 10
years. Still, I need to mention JPMorgan Chase: Paying a measly 2%
premium over book value for this superbly-run bank looks very inviting,
indeed.

Last edited by Salinder Kumar on Tue, 07/28/2009 - 16:42 | Write to author: Alex Dumortier |