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James Li
James Li
Articles (464)  | Author's Website |

An Analysis of 3 Major US Banks

Comparative analysis on ROE, ROA and net interest margin

July 14, 2017 | About:

Wells Fargo & Co. (NYSE:WFC), JPMorgan Chase & Co. (NYSE:JPM) and Citigroup Inc. (NYSE:C) reported earnings July 14. We can compare the three banks’ return on equity, return on assets and net interest margin with the respective values for all U.S. banks to determine which bank has good growth potential in the short term.

Return on equity

The return on equity (ROE) measures a company’s efficiency at generating profits from every unit of shareholder’s equity. Figure 1 shows the ROE of the three banks compared to the ROE of all U.S. banks.

Figure 1

Wells Fargo’s ROE has remained consistent albeit underperforming the “total bank ROE” since 2016 according to Figure 1. The San Francisco-based bank reported an ROE of 11.95% for the second quarter, about 2% higher than the ROE from the prior quarter and outperforming 62% of global competitors.

On the other hand, Chase and Citigroup had more volatile returns, suggesting these two banks have inconsistent efficiency at generating profits for each unit of equity. Although Chase slightly increased its ROE during the second quarter, the bank’s first-quarter ROE of 6.59% underperforms 69% of global competitors.

Return on assets

According to the Du Pont Formula, the return on assets (ROA) is either the net profit margin times the asset turnover or the ROE divided by the leverage ratio (the reciprocal of the equity-to-asset ratio). Due to this, the ROA trendline is a “scaled” version of the ROE trendline (the scale factor is the leverage ratio) as Figure 2 illustrates.

Figure 2

Unlike Wells Fargo, both Chase and Citigroup generally had lower ROA than that of all U.S. banks, implying inefficient generation of profit for every $1 in total assets. Chase Bank’s ROA reached a five-year low of -0.06% during third-quarter 2013 and has languished slightly below the benchmark since 2015. On the other hand, Citigroup’s ROA reached near a five-year low twice since 2014. Citigroup reported an ROA of 0.83% for the second quarter, about 0.3% lower than Chase’s.

Net interest margin

The net interest margin (NIM), a special financial metric that only applies to banks, is the ratio of the tax-adjusted net income to the average earning assets. Figure 3 shows the NIM of the three banks compared to the NIM for all U.S. banks.

Figure 3

While all three banks generally had lower net interest margins, Citigroup’s NIM outperformed the benchmark during 2014 and during 2016, suggesting Citi generated more interest revenue from its investments than the average U.S. bank. Wells Fargo, on the other hand, had gradually decreasing net interest margins, suggesting the bank paid more interest for its debt than it generated from investments. Wells Fargo reported a net interest margin of 2.90% for the second quarter, an increase of just 0.03% from the prior quarter.


Based on the analysis, Wells Fargo has good growth potential as it has consistent ROE and ROA. The bank’s profitability and business predictability rank 6 out of 10 and 2 out of 5 respectively. Wells Fargo’s operating margin and net margin are both near a 10-year high. The company also has consistent revenue growth even though the growth rate underperforms 54% of global competitors.




See also

GuruFocus introduced several new features within Interactive Charts, including industry-specific economic indicators according to a recent new feature announcement. For example, you can create a chart that compares Exxon Mobil Corp.’s (NYSE:XOM) revenue to crude oil prices.


Disclosure: The author has no positions in the stocks mentioned.

About the author:

James Li
I am an editorial assistant and researcher at GuruFocus. I have a Master's in Finance from SMU, and I enjoy writing reports on financial trends and investor portfolios. Follow me on Twitter at @JamesLiGuru!

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