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Tuesday, August 08, 2006

Market Cap Dominance in Banking (BAC, C, JPM)

Stock Tickers (BAC, C, JPM)

Cheering on the market capitalization rates of certain companies in the end can end up being as useful as rearranging the deck chairs on the Titanic, if you will pardon a borrowed cliche. This reference is to the media comparing Bank of America (BAC) and Citigroup (C) as to which is worth more in the equity market capitalization. It is worth throwing in JPMorgan (JPM) in this as well. Of course growing market capitalization rates mean growing share prices, and that is not what we are trying to address. We are addressing the "which has the larger market cap" as the immaterial part.

If you compare and contrast these three companies they are quite different operations altogether. They are first and foremost depository megabanks domiciled in the US, but the underlying operations pair off after that.

Below are the direct comparisons based on a snapshot around 10:00 AM EST:

Market Cap $237+B $239+B $158B
Stock Price $52.38 $48.37 $45.55
52-Week Price Range $41.13-52.75 $42.91-50.72 $32.92-46.80
Trailing P/E 12.75 9.8 13.7
Forward 2006 P/E 11.41 11.3 12.75
Forward 2007 P/E 10.6 10.46 11.52
Dividend Yield 4.30% 4.00% 3.00%
2005 Revenues $83.98B $120B $79.9B
2005 Total Assets $1.29 T $1.49 T $1.19 T
Avg. $ Share Vol/Day $693,294,030 $748,269,389 $536,844,230
Employees (stated) 176,638 299,000 168,847

While is it good to compare all these, there are some issues to note.

Citigroup (C) actually has a much larger international operation, and has still has room to grow. Citigroup has had its hands tied for a mini-lifetime where the Fed imposed a NO-ACQUISITION status to it until it got its international books in order. That has now passed, and one of the key holders Saudi Prince Alwaleed bin'Talal (forgive spelling there) has gone as far as formally asking the company to begin taking "Draconian Measures" to improve its core operations. The company can still make acquisitions inside the US, but it is being called on to still get its own house more in order and may resume its old habit of looking toward more international markets where more growth opportunities lie.

Bank of America (BAC) is more domestic and it has no more core growth opportunities left inside the US as the company is snugged up against the deposit limitations inside the US. US current limitations allow banks to have up to 10% of the banking deposits in the US, and B of A was around 9.8% earlier this year. If they can get the legislation changed for the deposit base to include credit union deposits then that may change, but for now this applies to banks. The company can of course grow deposits organically and through new branch openings, but it cannot go out and acquire any extra in deposits as it has in the past. It CAN go do International acquisitions, and that is where the company will have to focus. It has recently acquired credit card operations by acquiriung MBNA, and it is still free to go out and add on more operations outside of the deposit side in the financial community. The company has made partnerships overseas, and share holders may start to think of the old Bank of America woes from South America back in the 1980's if they get too ambitious, even though that was the "old" Bank of America and not really the new company.

After reviewing these it was also interesting to look at JPMorgan (JPM). Both JPMorgan and Citigroup are well off of their all-time stock highs, while B of A was essentially very close to their all-time high. JPMorgan (JPM) is of course the old Chase-Maufacturers Hanover-and so on plus Bank One under Jamie Dimon that operates in all banking and investment banking operations. It is still able to consider making a banking deal as there are many markets it has no dominance in, and the street has speculated that Dimon has been wanting to for a while. It just seems that no one has been considering themselves excessively rewarded since the old deal happened.

While market caps matter when you are an investor in one of the companies, the comparative market caps are really of little value unless you look at the bigger picture. You have to decide which one has the best growth opportunities or which has the best income opportunities. If you just use the old "all-time highs" as a measure, then you would surmize that Citigroup and JPMorgan would be better choices. If you look for predictability of income it would seem that the steady-eddie would be Bank of America, since they are less likely to even be able to make a dilutive acquisition. JPMorgan and Citigroup would be more of a direct comparison to each other, but becaus eof the size difference the media is just focusing on Bank of America and Citigroup.

The "correct answer" depends on what you are looking for.

Jon C. Ogg
August 8, 2006

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