I write quite about the financial condition of the four money centers: JPMorgan Chase (JPM), Wells Fargo (WFC), Bank of America (BAC) and Citigroup (C). The reason I focus on them, to the exclusion of the rest of the banks, is that they are operated essentially as government agencies.
These banks are largely responsible for the implementation of monetary policy for the rest of the banking system and have business strategies (as reflected in their financial conditions) that are most logically the result of coordinated efforts with various other government agencies and regulatory bodies.
The most glaring issue is the outsized percentage of carried nonperforming residential mortgages, which I write about regularly. At the money centers, the average rate of nonperforming mortgages as a percentage of all carried mortgages is 8%. To put this in context, the average rate for the next 160 banks, based on size, below the money centers, is about 3.5%. The average of the other 6,200 or so banks below them is about 1.5%. There is no legitimate business reason for the money centers to be carrying such a large percentage of nonperforming loans that they are not putting through the process of recovery, other than that the government does not want them to.
The increasingly close relationship between the government and the largest financial institutions is also evident in their inclusion in the list of globally systemically important banks (G-SIBs), as I discussed this past February in the column, "Welfare for the Wealthy."
Also in that list, however, are Goldman Sachs (GS), Morgan Stanley (MS), Bank of New York Mellon (BK) and State Street (STT). These institutions all have business strategies that are very different from the four money centers, and they have financial conditions that are indicative of a very different relationship with the government. I'll compare Goldman Sachs to the money centers here and address the others along with First Republic Bank (FRC) in a future column.
Goldman's financial condition is dramatically different from all the money centers. Although it has aggressively pursued the traditional banking business of deposit-taking and loan-making since becoming a bank during the financial crisis of 2008, its business focus is radically different than that of the money centers.
First, the bank has almost no nonperforming loans of any kind. In the past three years, its book of carried loans has tripled to about $45 billion. It has also distributed the kinds of loans they are making very evenly, and has managed to maintain a percentage across all loan categories similar to what it was three years ago. Its largest concentration of loans is commercial and industrial (C&I) at about at 28% of the total, which has increased over the past three years to about $13 billion from about $4 billion. The percentage of them that are nonperforming is 0.09%. By comparison, the percentage of nonperforming loans at each of the money centers is about 0.5%.
The next-largest loan category at Goldman is first-trust residential, at about 11% of the portfolio -- about where it's been for the past three years, even as the carried balance has increased to $5.3 billion from about $1.6 billion. The percentage of nonperforming loans in this category is 0.02% vs. the money center average of 8%.
The next category is commercial real estate, at about 10% of the total, up from about 8% three years ago, and moving to $4.3 billion from about $1.1 billion. The percentage of nonperforming loans is about 0.85%, which is very close to the money centers. No other loan category at Goldman has any nonperforming loans.
The issue for investors to consider is to ask how it is possible that Goldman can manage to carry almost no residential first-trust mortgages that are not performing while at the money centers about one out of every 12 loans is in default. I'm not an advocate of Goldman as an investment. In the past five years, its stock has appreciated by about 35%, which is about equal to Bank of America, but behind Citi, Morgan and Wells at about 50%, 80%, and 130%, respectively. It's also about a third of the S&P 500.
Goldman's shares trade at a trailing and forward price-to-earnings ratio that is below those of the money centers', even though it has a much better business strategy and asset management than any of the other money centers. The logical reason for this is that investors are willing to pay a premium for lesser-performing and less well-managed companies, solely because they are too big to fail.