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TheStreet Open House

'Too Big to Fail' Gets Even Bigger

NEW YORK (TheStreet) -- Most people concerned over bank bailouts and the risk to the economy and taxpayers from "too big to fail" banks may not realize that despite the best intentions, new regulations are keeping the big banks from shrinking.

Stock valuations for the six largest U.S. banks are rather low, with the group trading for an average of 9.6 times consensus 2015 earnings estimates, based on Friday's closing prices.

Looking at the remaining 284 banks for which consensus 2015 earnings estimates are available from Thomson Reuters Bank Insight, the ones with market capitalization above $5 billion trade for an average of 13.3 times forward earnings estimates, while the names with market caps between $1 billion and $5 billion trade for 15.3 times forward earnings and the banks with less than $1 billion in market capitalization trade for 16.1 times forward earnings.

That's a pretty clear pattern. The smaller banks, on average, are more profitable than the big ones, and investors prefer names with solid growth opportunities.

Meanwhile, most of the big guys keep getting bigger. Here's a quick look at the nation's six largest banks' asset growth, or shrinkage since the end of 2006, before any hint of the U.S. real estate collapse, along with forward P/E ratios and returns on equity:

JPMorgan Chase (JPM) had total assets of $2.416 trillion as of Dec. 31, increasing from $2.359 trillion a year earlier and $1.352 trillion at the end of 2006. The asset growth included the government-brokered acquisitions of Bear Stearns and the failed Washington Mutual in 2008. JPMorgan's return on average tangible common equity (ROTCE) was 11.92% during 2013, declining from 14.72% in 2012, according to Thomson Reuters Bank Insight. The 2013 results were lowered by a third-quarter net loss, when the company set aside $7.2 billion, after taxes for litigation reserves, ahead of $17.5 billion in residential mortgage backed securities settlements with government authorities and private investors in the fourth quarter. The company's fourth-quarter results were lowered by $1.1 billion after tax from legal expenses, which included the bank's deferred prosecution agreement with the Department of Justice over its role in the Bernard Madoff Ponzi scheme. JPM's shares closed at $57.61 Friday and traded for 9.1 times the consensus 2015 EPS estimate of $6.35.

Bank of America (BAC) had $2.102 trillion in assets as of Dec. 31, down 5% from a year earlier, but up from $1.456 trillion at the end of 2006. The bank acquired Countrywide Financial and Merrill Lynch during 2008. Bank of America's ROTCE was 7.94% in 2013, increasing from 2.96% in 2012. Bank of America's shares closed at $156.29 Friday and traded for10.1 times the consensus 2015 EPS estimate of $1.62.

Citigroup (C) had $1.881 trillion in total assets as of Dec, 31, increasing 1% from a year earlier, but declining slightly from the end of 2006. The bank's 2013 ROTCE was 8.2%, improving from 4.8% in 2012. Citi's shares closed at $48.26 Friday and traded for 8.4 times the consensus 2015 EPS estimate of $5.76. That makes Citigroup one of the cheapest U.S. bank stocks, regardless of company size.

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