NEW YORK (TheStreet) -- Bank of America (BAC - Get Report) CEO Brian Moynihan expects a major improvement in the company's earnings performance over the next few years, bringing it close to the performance level of JPMorgan Chase (JPM - Get Report), but which stock is a better long-term play?
When asked about the company's goals for returns on assets (ROA) and equity during an earnings conference call on Jan. 15, Moynihan said "we are looking to get to the point where we are returning 1% on assets, which translates into a 14% return on tangible common equity. Those are the types of levels that we see ourselves looking to achieve over the course of the next three years," according to a transcript provided by Thomson Reuters.
Bank of America's ROA during 2013 was 0.53% and its Return on Average Tangible Common Equity (ROTCE) was 7.94%, according to Thomson Reuters Bank Insight. Going forward, major U.S. banks will see a drag on ROTCE because they are meeting much higher minimum capital requirements required under the international Basel III agreement and the Dodd-Frank banking reform legislation of 2010.
Bank of America's earnings performance during 2013 was its best since 2007, as the company has been recovering from the credit crisis and its disastrous purchase of Countrywide Financial in July 2008 as the housing market was collapsing. The bank's ROA was 0.94% and its ROTCE was 27.46% during 2007, and its ROA ranged from 1.30% to 1.34%, with ROTE ranging from 27.45% to 36.86% from 2004 to 2006. Looking several years out, those ROTCE figures won't be possible with tangible common equity ratios rising so much over the past few years.
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JPMorgan Chase's 2013 ROA was 0.75% and its ROTCE was 11.92%. However, the company's 2013 results included a third-quarter net loss, springing from provisions for litigation reserves that lowered its after-tax earnings by $7.2 billion, in preparation for its $17.5 billion in residential mortgage-backed securities settlements with government authorities and investors during the fourth quarter. The company's fourth-quarter results were lowered by $850 million after tax, resulting from JPMorgan's deferred prosecution agreement with the Department of Justice over the bank's role in the Bernie Madoff Ponzi scheme.
During 2012, JPMorgan's ROA was 0.94% and its ROTCE was 14.72%, despite the pretax losses of over $6 billion the company booked as a result of the "London Whale" hedge trading debacle. The bank's ROA ranged from 0.85% to 0.86% and its ROTCE ranged from 15.05% to 15.26% from 2010 through 2011. Meanwhile, Bank of America showed negative ROA and ROTCE during 2010, and marginal ROA of 0.06% and ROTCE of 1.08% during 2011.
Bank of America has been a very hot stock over the past two years, with shares returning 34% during 2013, following a 110% return during 2012. JPMorgan Chase's stock returned 37% during 2013, but "only" 36% during 2012. Investors who climbed aboard the Bank of America recovery bandwagon at just the right moment have made a killing. Long-term investors, however, would have been much better off holding shares of JPMorgan Chase if we look back to the end of 2006, before the U.S. housing market began showing signs of collapse:
data by YCharts
Can Bank of America hit Moynihan's ROA goal of 1% and its ROTCE goal of 14% in three years? Oppenheimer analyst Chris Kotowski believes these goals are "quite reasonable." Bank of America has made major strides in its cost-cutting program, and the continuing economic recovery and work-outs of nonperforming mortgage loans and repossessed properties can only lead to a further lowering of expenses, with growth opportunities as well.
But in a note to clients on Tuesday, Kotowski wrote that JPMorgan appeared to be a lower-risk play than Bank of America, in part because of "higher upfront cash flows (i.e. JPM's dividend of $0.38 vs. BAC at $0.01, though by our estimates going to $0.10 after CCAR) and a slightly higher terminal multiple based on slightly higher profitability."
CCAR stands for Comprehensive Capital Analysis and Review. The Federal Reserve will announce the results of its annual stress tests for major U.S. financial firms in early March, and will complete CCAR a week later. This process leads to a slew of mid-March announcements of dividend increases and share repurchase plans.
Looking out to the end of 2014, Kotowski wrote, "We think that, if BAC succeeds in its goal, it will almost certainly be a good stock to own, but what is interesting is that JPM would be as good or better."
Bank of America's shares closed at $16.73 Tuesday, while JPMorgan Chase closed at $55.74.
According to Kotowski's summary of estimated total returns through 2016, Bank of America could see its shares rise to $22.28 and pay out total dividends of $1.47 a share, for a return of $7.05 a share, or 42% from Tuesday's close. That would make for an annualized internal rate of return (IRR) of 12.5%, according to the analyst.
JPMorgan, according to Kotowski's estimates, could see its shares rise to $79 through the end of 2016, with total dividends of $5.46 a share, for a total return of $28.74 a share, or 52%. That would make for an IRR of 14.9%.
So JPMorgan Chase wins Kotowski's "Pepsi Challenge" by a decent margin.
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