Which Bank Stocks Deserve the Rout, Which Are Overreactions

Bank stocks are in panic mode again. Given that the financial sector is the most interconnected and interdependent of any in the world, it makes sense that when one bank falls, others fall with it, regardless of which banks are actually exposed to the most troubled sectors. The collapse of the energy sector has investors worried that credit exposure to the energy sector could lead to a repeat of 2008 when real estate exposure caused a systemic banking collapse. But is that really the case?

Of the four largest banks by assets in the United States, Bank of America Corp (NYSE: BAC) and Citigroup Inc. (NYSE: C) are down the most year-to-date at over 20%. Wells Fargo & Co. (NYSE: WFC) and JPMorgan Chase & Co. (NYSE: JPM) are both down just over 10%. First of all, is this even close to a repeat of 2008, and second, which moves down since the beginning of the year are more justified fundamentally, and which are overreactions?

Let’s take a look by the numbers. All figures are taken from annual reports of respective years for each bank.

JPMorgan

JPMorgan has a total loan portfolio of $837.3 billion. Total credit exposure to oil and gas is seventh on the list of exposure by industry, totaling $42.1 billion. That’s 5% of its total loan exposure. Real estate is number one at $116.9 billion, or 14%.

At the end of 2007, JPMorgan had total credit exposure of $142 billion to real estate plus banks plus asset managers, which are all layered on top of one another (see page 78) so we can combine them, give or take a few billion. The total loan portfolio back then was $632 billion, making total exposure to real estate both directly and through banks about 22%. That’s a far cry from the 5% exposure to oil and gas today, or slightly higher than 5% if we count a portion of today’s banking loans. How does that compare to the other money centers?
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Bank of America

Total loans today are $903 billion. Credit exposure to the energy sector is now $43.8 billion, ninth on the list by sector, for a 4.8% exposure. Real estate is number two today at $87.65 billion, or 9.7%. Compared to the end of 2007, credit exposure to real estate was number at $111.74 billion of a total $776 billion loan portfolio, for a 14.4% exposure not counting exposure to banking sector loans on top of that as above with JPMorgan. These are all similar numbers to JPMorgan, and still not exactly a 2008 situation with real estate.

Citigroup

Total credit exposure to energy is $21 billion, 3.5% of outstanding loans, which total $605 billion. Unlike the other megabanks though, Citi’s number one credit exposure is transportation and industrial, much of which actually benefits from lower energy prices, so Citi is in good shape here comparatively as it is naturally hedged. At the end of 2007, main exposure was to banks, so indirect exposure to real estate was what brought the bank down. Given that Citigroup is performing horribly since the beginning of the year, much worse than either Bank of America or JPMorgan, it looks like it is an overreaction in this case, at least as far as energy sector loan exposure is concerned.

Wells Fargo

Oil and gas total 2% of total loans outstanding. At the end of 2007, real estate loans comprised 15% of total loans outstanding. Again, not a 2008 situation, and with only 2% exposure to oil and gas, Wells Fargo is in a slightly better situation energy-wise than either Bank of America or JPMorgan.

Conclusion being, if you’re after good deals on bank stocks, then at least by energy sector exposure metrics, your best choices are Citigroup and Wells Fargo.