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Better Buy: Bank of America Corporation vs. JP Morgan Chase

Matthew Frankel, CFP®, The Motley Fool

JPMorgan Chase (NYSE: JPM) and Bank of America (NYSE: BAC) are two of the largest banks in the United States, and have rather similar business structures. For investors seeking some financial sector exposure in their portfolios, which is the better stock to buy now?

Business-wise, the two banks are quite similar

Both JPMorgan Chase and Bank of America are universal banks and are quite comparable in size and business structure.

Metric/Statistic

JPMorgan Chase

Bank of America

Total Assets

$2.6 trillion

$2.3 trillion

Total Loans

$948 billion

$936 billion

Total Deposits

$1.45 trillion

$1.31 trillion

U.S.-Based Deposits

$1.2 trillion

$1.23 trillion

Approximate % of Revenue from Consumer/Commercial Banking

52%

40%

Approximate % of Revenue from Corporate and Investment Banking Activities

35%

40%

Approximate % of Revenue from Asset and Wealth Management

13%

20%

Long-Term Debt

$273 billion

$227 billion

Data source: Company financial statements. Percentages may not add to 100% due to rounding and "other" sources of revenue in each bank's income statement.

Bank teller greeting a customer.

Image source: Getty Images.

JPMorgan Chase is best-in-breed

JPMorgan Chase's business has been firing on all cylinders, and ever since Wells Fargo's scandals began, the bank has become the clear best-in-breed among the big U.S. banks.

In the most recent quarter, JPMorgan Chase's return on equity (ROE) of 14% and return on assets (ROA) of 1.28% were the highest of the "big four" U.S. banks and are well in excess of the industry benchmarks of 10% and 1%, respectively. Plus, the bank's efficiency ratio of 58% puts it among the best of all brick-and-mortar banks. Lower is better, and anything under 60% is great for a big bank.

In addition, the bank has been growing nicely. The loan portfolio grew by 4% year over year, and the asset and wealth management segment saw client assets rise by 8%. Trading revenue from the investment banking side of the business has been a weak spot, and JPMorgan Chase delivered 13% higher results than had been expected.

In fact, JPMorgan Chase's results were so strong that the bank won Federal Reserve approval to increase its dividend by 43%. Shares now yield over 2.8%, one of the highest dividends in the banking sector.

Bank of America has improved more than investors often give it credit for

While I wouldn't quite put it in the same category as JPMorgan Chase, Bank of America is doing extremely well and has completely reinvented itself in the post-financial-crisis era. In fact, out of the "big four," I'd rank it number two in terms of quality, only behind JPMorgan Chase.

While the bank's ROE and ROA of 10.8% and 1.17%, respectively, don't quite measure up to JPMorgan Chase, this is quite impressive considering that the bank spent much of the time since the crisis well below the industry benchmarks on both metrics. And if I told you five years ago that Bank of America would achieve a 59% efficiency ratio, you would have said I was crazy.

Furthermore, the bank is growing faster than most competitors, with 7% consumer loan growth and 5% deposit growth over the past year. While its trading performance isn't quite as strong as JPMorgan's, a 20% growth rate in Merrill Edge brokerage assets is extremely impressive.

The point is that while JPMorgan Chase is the best-in-breed of the largest U.S. banks, the overall quality difference isn't as big as you might think.

A considerable difference in valuation

In banking, like with most other industries, you can expect to pay for quality, and that's especially true in this comparison. JPMorgan trades at a significantly higher valuation than Bank of America:

Metric

JPMorgan Chase

Bank of America

Price-to-Book Value

1.67

1.28

Price-to-Tangible Book

2.09

1.81

Data source: Company financials and author's own calculations. Metrics calculated on 8/16/18.

The verdict

In the end, these two banks are pretty evenly matched. JPMorgan Chase generates ROE and ROA that are 30% and 9% higher than Bank of America's, respectively, but B of A trades for P/B and P/TB metrics that are 23% and 13% cheaper and has been improving at a more impressive pace.

The bottom line is that you won't go wrong with either of these bank stocks. Both should deliver excellent returns over the long run. Having said that, if I were going to buy one today, it would have to be Bank of America -- not just because I already own shares, but for its low valuation and continuous improvement.

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Matthew Frankel, CFP® owns shares of Bank of America. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.