Which is the better stock to purchase today: JPM or BAC?

[Libs]

Nice thread.

NIM compression has been relentless but no one seems to talk about it. It worries me. Anyone else?

 

[redhots]

Yeah, BAC is still trading almost at Munger's DJCO buy price. I have added a bit recently. I also hold some JPM.

 

According to this Munger bought BAC at around $5 or $6?  -->  Q4 2011.    No?

http://www.valuewalk.com/2013/09/charlie-munger-daily-journal/

 

 

[Jurgis]

Yeah, BAC is still trading almost at Munger's DJCO buy price. I have added a bit recently. I also hold some JPM.

 

According to this Munger bought BAC at around $5 or $6?  -->  Q4 2011.    No?

http://www.valuewalk.com/2013/09/charlie-munger-daily-journal/

 

You might be right. DJCO did not have to report these positions until 2013, so the price paid is unclear. Assuming we trust the article you pointed to, it might be $5 or $6.

[sleepydragon]

Nice thread.

NIM compression has been relentless but no one seems to talk about it. It worries me. Anyone else?

 

yestoday wsj talked about it. It's about jpm start charging fees for some deposit.

Rate raise is not coming, nim getting worse, but legal expense keep rising.

[Viking]

Right now most people are looking at the big bank and all they see are the challenges: large legal payouts, worsening regulation, shrinking NIM, all pointing to lower rates of return than those earned pre-2008.

 

People are not looking at the other side of the equation: the big banks have been given time to earn their way out of the mess they created. Looking at the past 10 years, yes, there are many bad things that happened and shareholders have not been rewarded (long term shareholders). The big US banks are like coiled springs right now. As people come to appreciate how they will each adjust their business models and grow earnings in the future we will get a nice jump in the share price. It reminds me of Apple 18 months ago. Everyone was overemphasizing the negatives and underemphasizing the positives. Over the next 18 months I expect the big banks to earn some crazy amounts of money; this will be spent increasingly on dividends and share repurchases. A virtuous circle. At some point the the big banks will be where the hot money will go and everyone will love them again. Crazy how the pendulum swings back and forth over time.

[wescobrk]

Dimon said on the Q&A a couple of days ago he thinks JPM within 2 years will see better environment with regulators and they have have a premium PE in 4 years.

He sounds exhausted with Justice Department.

Do the government a favor and then take a pound of flesh for 6 years.

Hopefully he is right and in 2017 the taking of flesh will be largely done.

 

Banks will definitely have vastly higher P/E ratios in 2-4 years but we have to keep in mind the ROE the regulators will allow them to earn. If one forecasts an ROE higher than the low to mid teens, I think will be overly optimistic.

[sleepydragon]

Right now most people are looking at the big bank and all they see are the challenges: large legal payouts, worsening regulation, shrinking NIM, all pointing to lower rates of return than those earned pre-2008.

 

People are not looking at the other side of the equation: the big banks have been given time to earn their way out of the mess they created. Looking at the past 10 years, yes, there are many bad things that happened and shareholders have not been rewarded (long term shareholders). The big US banks are like coiled springs right now. As people come to appreciate how they will each adjust their business models and grow earnings in the future we will get a nice jump in the share price. It reminds me of Apple 18 months ago. Everyone was overemphasizing the negatives and underemphasizing the positives. Over the next 18 months I expect the big banks to earn some crazy amounts of money; this will be spent increasingly on dividends and share repurchases. A virtuous circle. At some point the the big banks will be where the hot money will go and everyone will love them again. Crazy how the pendulum swings back and forth over time.

 

I am trying to decide if i shall add to my WFC or buy some JPM. JPM seems cheap. I know someone who work at JPM investment banking side whom i considered a high iq low iq idiot. His favoriate activity is to buy the most expensive things and then visit the neighbors. Compesation at JPM investment banking side seems very excessive.

[Viking]

Over the past 8 weeks in have listened to JP Morgan's investor day, and (for both JPM and BAC) read the CEO letters in 2014 Annual Reports, read Q1 earnings report and and listened to Q1 earnings conference calls. I have also been following the companies pretty closely for about the past 6 months. I have decided that today JPM is the better investment (for me).

 

I continue to like BAC and feel it should do well for those with a 24-36 month time horizon. It looks to me that the big litigation bills are behind BAC which is great. Future earnings will finally drop to the bottom line. However, given all the earnings that have been drained from the company over the past 5 years due to litigation it appears BAC will need a couple of years of earnings to get its capital levels up to those of Citi or JPM. I just get the sense that BAC is at least one year behind Citi and perhaps two years behind JPM in terms of cleaning up legacy issues and being able to move forward in a quality way. BAC also looks to be slow to adjust their business model given the new regulatory framework. As a result, moving forward, BAC will show nice earnings growth and the business will improve from here. However, there is a great deal of execution risk. Add in the fact that Moynihan is a poor communicator (just compare his comments in the BAC 2014 Annual Report to Jamie Dimon's comments in the JPM AR) and the execution risk gets even bigger. The wild card for BAC is interest rates. If interest rates increase the stock will pop as it is highly leveraged to movements in interest rates. Should interest rates stay low then earnings for BAC will be hurt as NIM continues to be compressed.

 

JPM really looks to be firing on all cylinders right now. All of its business units are doing good to great. Legacy issues, which are already quite small, should be behind the bank in about another 12 months (for the most part). Most importantly the company is totally dialled into the current regulatory reality and are managing each of the businesses to optimize on this. The dividend yield is about 2.7% ($0.44/share/quarter). The share buyback is good, although stock issuance each year offsets about half of this benefit. The stock is cheap, trading at less than 11 times 2015 estimated earnings. Earnings are expected to grow better than 10% per year over the next couple of years. Should interest rates normalize JPM will also benefit (just not as much as BAC).

 

My key takeaway is JPM looks to be a best in class company (large U.S. bank). I am not sure how good the new BAC will be; might be great or might be terrible (likely will be somewhere in between). We likely won't know the answer for BAC for another couple of years. BAC is much cheaper. For me, today, JPM is the better investment. Better quality. Better management. Better plan. Better results.

[Patmo]

Dimon said on the Q&A a couple of days ago he thinks JPM within 2 years will see better environment with regulators and they have have a premium PE in 4 years.

He sounds exhausted with Justice Department.

Do the government a favor and then take a pound of flesh for 6 years.

Hopefully he is right and in 2017 the taking of flesh will be largely done.

 

Banks will definitely have vastly higher P/E ratios in 2-4 years but we have to keep in mind the ROE the regulators will allow them to earn. If one forecasts an ROE higher than the low to mid teens, I think will be overly optimistic.

 

They'll keep going after him as long as Jamie Dimon acts like Jamie Dimon imo...

[sleepydragon]

Dimon said on the Q&A a couple of days ago he thinks JPM within 2 years will see better environment with regulators and they have have a premium PE in 4 years.

He sounds exhausted with Justice Department.

Do the government a favor and then take a pound of flesh for 6 years.

Hopefully he is right and in 2017 the taking of flesh will be largely done.

 

Banks will definitely have vastly higher P/E ratios in 2-4 years but we have to keep in mind the ROE the regulators will allow them to earn. If one forecasts an ROE higher than the low to mid teens, I think will be overly optimistic.

 

They'll keep going after him as long as Jamie Dimon acts like Jamie Dimon imo...

 

 

I have checking, savings, investments accounts with Bank of America, for the last 20 years. I put all my money there. But during the last week, I opened a checking, savings and a credit card at JPM Chase. I got a total of $450 signing bonus for the checking and savings accounts, and 45000 bonus (=$450) from the credit card. That's a total of $900 for just doing a little bit of work.

 

JPM is using some very brutal methods to get clients from Bank of America and American Express. Their top credit card executive was hired away from American Express, who designed the new Saphire card.  I liked their Saphire card. it's made of a piece of  metal. Pretty heavy. Looks like a AXP blackcard, but only $95 fee (first year waived). When you no longer want it, you have to mail it back to them (and supposedly they will melt it in fire like in what they do in lords of rings). I think it's working. It's costly, but a lot of people who are not willing to move checking accounts can no longer resist. These people are pretty sticky (or lazy) like me.

 

The only thing I think JPM is missing is an investment/retail brokerage. WFC and BAC both offers it. BAC give me 100 free trades/month. WFC charge about $7/trade.

 

[treasurehunt]

Over the past 8 weeks in have listened to JP Morgan's investor day, and (for both JPM and BAC) read the CEO letters in 2014 Annual Reports, read Q1 earnings report and and listened to Q1 earnings conference calls. I have also been following the companies pretty closely for about the past 6 months. I have decided that today JPM is the better investment (for me).

 

I continue to like BAC and feel it should do well for those with a 24-36 month time horizon. It looks to me that the big litigation bills are behind BAC which is great. Future earnings will finally drop to the bottom line. However, given all the earnings that have been drained from the company over the past 5 years due to litigation it appears BAC will need a couple of years of earnings to get its capital levels up to those of Citi or JPM. I just get the sense that BAC is at least one year behind Citi and perhaps two years behind JPM in terms of cleaning up legacy issues and being able to move forward in a quality way. BAC also looks to be slow to adjust their business model given the new regulatory framework. As a result, moving forward, BAC will show nice earnings growth and the business will improve from here. However, there is a great deal of execution risk. Add in the fact that Moynihan is a poor communicator (just compare his comments in the BAC 2014 Annual Report to Jamie Dimon's comments in the JPM AR) and the execution risk gets even bigger. The wild card for BAC is interest rates. If interest rates increase the stock will pop as it is highly leveraged to movements in interest rates. Should interest rates stay low then earnings for BAC will be hurt as NIM continues to be compressed.

 

JPM really looks to be firing on all cylinders right now. All of its business units are doing good to great. Legacy issues, which are already quite small, should be behind the bank in about another 12 months (for the most part). Most importantly the company is totally dialled into the current regulatory reality and are managing each of the businesses to optimize on this. The dividend yield is about 2.7% ($0.44/share/quarter). The share buyback is good, although stock issuance each year offsets about half of this benefit. The stock is cheap, trading at less than 11 times 2015 estimated earnings. Earnings are expected to grow better than 10% per year over the next couple of years. Should interest rates normalize JPM will also benefit (just not as much as BAC).

 

My key takeaway is JPM looks to be a best in class company (large U.S. bank). I am not sure how good the new BAC will be; might be great or might be terrible (likely will be somewhere in between). We likely won't know the answer for BAC for another couple of years. BAC is much cheaper. For me, today, JPM is the better investment. Better quality. Better management. Better plan. Better results.

 

Viking, I like your take on JPM and BAC. I used to own roughly equal amounts of the two companies, but now my JPM position is about 70% bigger than my BAC position (mostly JPM warrants). JPM's various businesses are in wonderful shape; they just need to deal with litigation and capital issues, which at this point, don't seem so huge. BofA's improvement has certainly been much slower than I anticipated. The stock looks cheap though.

 

But speaking of cheap financials, what do you think of Goldman? The business is less predictable than JPM and perhaps BAC, but the stock is cheap and Goldman is a best-in-class investment bank. They have earned about 11% on equity the last three years, but could earn 15% or so over the cycle. Recently they reworked their performance-based awards for top executives to pay out only if the company achieves decent ROE targets (one award requires 11% ROE over three years, another 12% over 8 years): http://www.ft.com/intl/cms/s/0/3e4de7e2-df8e-11e4-a6c4-00144feab7de.html#axzz3Xc2ZCOUH. I assume management thinks these targets are achievable. If Goldman can earn 15% ROE in a normal environment, their normalized earnings right now would be about $24 per share. A P/E of 12 would put the share price at $288, which is about 40% higher than where the shares are currently trading. Goldman has also been buying back shares at a faster clip than either JPM or BAC. I suppose there is the risk of very volatile earnings and some of their trading operations being regulated away.

[Viking]

treasurehunt, I have not followed Goldman very closely. My learning is to go with the best in class and Goldman is very well respected. I was overweight BAC and underweight JPM; I am now way overweight JPM and still hold a much smaller amount of BAC that I will likely sell over time. I think all of the big U.S. banks are cheap at current prices.  Sentiment is just starting to shift for the large banks from deeply hated to neutral. In another 12 to 18 months hopefully everyone will be in love with them. Earnings growth + multiple expansion + lower share count = outsized returns. Decent dividend is icing on the cake (get paid to wait).

 

A final comment on BAC. Given how much work they still have to do moving forward to right the ship I found it very challenging mentally to be invested in BAC the last 6 months (I tend to have pretty high weightings). Q4 earnings missed expectations. CCAR was disappointing. The annual report was disappointing with little communication from Moynihan to give investors hope. Q1 results were OK but not great; Moynihan's comments were also ho hum. Now i do not expect or want a cheer leader; however, given what Bank of America still has to get done to right the ship I do expect the leader to provide leadership for investors as to what (specifically) the bank is going to do and by when. JP Morgan had its investor day in Feb where they laid out their plans in great detail for investors. Buying the best in class also provides a lot of psychological satisfaction. Perhaps a similar (but not great) comparison was a few years ago (three?) when I owned RIMM; every earnings report felt like I was being tortured; fortunately I sold out after a couple of earnings reports once I learned that Basilie was a dummy so my loss was small. The good is I learned a lot about the cell phone industry. Two years ago I took what I learned when invested in RIMM and loaded up on Apple (best in class and dirt cheap) and did very well. I also really enjoyed following Apple for 21 months on its journey and reading an enormous amount. Hopefully being invested in BAC is like tuition and the learnings (buy the best in the industry, like JPM and others) pays off down the road. Fortunately, my BAC shares are close to where I purchased them soselling and increasing my exposure to JPM has not cost me too much. Life is full of lessons....

[Viking]

Not good to see BAC ranked dead last in customer satisfaction in U.S. Citi was ranked second worst. JPM looks to be performing much better. I wonder if all the cuts Moynihan had to make the past couple of years to get costs in line have impacted customer service at the retail branches. These sorts of trends, once established, are also very hard to change.

 

Quotes from article: "As consumer sentiment toward the industry improved, Bank of America fell further behind competitors, according to the survey released Thursday."

 

"Bank of America’s customer satisfaction was below the average for each region, failing to rank better than third-worst, which is how it fared in Texas, the second-most populous state after California. Citigroup Inc., based in New York, was second-worst in California, Florida and Texas.

JPMorgan Chase & Co., the biggest U.S. bank, was ranked highest in Florida and never scored below the industry average. J.D. Power measured satisfaction in categories including problem resolution, products and fees and surveyed more than 80,000 bank customers. Bank of America’s consumer and business division is its largest by revenue and profit, earning $7.1 billion last year, a 6.8 percent improvement from 2013."

 

http://www.bloomberg.com/news/articles/2015-04-30/bank-of-america-is-least-loved-in-places-where-it-s-best-known