A New Look at Moat Ratings of 4 Banks

Eric Compton: After an extensive review of the competitive positioning of the big four U.S. money center banks, we have upgraded the moat ratings of JPMorgan and Bank of America to wide, while maintaining the moat rating of Wells Fargo at wide and Citigroup at narrow.

Our upgrades are based on a stronger U.S. banking system as well the increasing importance of size and scale in the banking industry. We believe the U.S. banking system is much stronger than it was a decade ago, leaving more room for wide moats among the best-positioned banks. Capital levels present within the system are higher than ever, and regulatory reform has reduced or eliminated many of the riskier activities within the money center banks.

We see the largest banks finally being able to focus on maximizing the value of their own franchises, largely based on scale and economies of scope advantages, enabled by ever improving technology platforms. On the consumer side, each bank is able to cross-sell multiple products, provide advantaged pricing to key customer segments, and spread the overall costs of customer acquisition across more revenue streams. On the commercial side, similar dynamics apply, and each bank is able to offer a complete package with national and/or global scale that few can compete with, while sending out armies of bankers to both existing and new markets in an effort to win new business. Over time, we see a bifurcation between the banks with the most scale, the most complete product stacks, and the most advanced technology backbones, and those that do not. We believe the wide moat money center banks, which have the largest tech budgets in banking, are likely to be in the first group.

While we are now more positive on the competitive positioning of JPMorgan and Bank of America, we believe this is largely priced in and view the names as reasonably valued. Instead, we see the most value in Wells Fargo and Citigroup, as each have their own issues and negative associations they are trying to deal with.