The financial sector has been one of the market’s top performers over the past couple of years, but that doesn’t mean there aren’t still great long-term investments to be found. Here’s why three Motley Fool investors think Goldman Sachs (NYSE: GS), JPMorgan Chase (NYSE: JPM), and Zions Bancorporation (NASDAQ: ZION) could be excellent additions to your portfolio in June.
An investment bank that could become a major consumer bank as well
Matt Frankel (Goldman Sachs): Most investors think of Goldman Sachs as an investment bank, and for good reason. The bank has the leading market share in mergers and acquisitions as well as equity underwriting, among other impressive statistics.
However, I think many people are underestimating the long-term potential of Goldman’s consumer banking business, which is still very much in its infancy.
Goldman’s Marcus platform has been quite successful since its late-2016 personal lending launch, originating more than $3 billion in personal loans in that time, and bringing in about $11 billion in consumer deposits since acquiring General Electric‘s deposit portfolio about two years ago.
This could be just the starting point, though. In a recent presentation, Goldman’s president and COO, David Solomon, emphasized that Goldman was aiming to build a large, digital consumer finance platform and could expand into other areas of consumer banking — specifically mentioning credit cards, mortgages, auto lending, and more. And with the recently reported co-branding partnership to issue an Apple Pay credit card, it doesn’t look like Goldman is wasting any time.
One of the most interesting aspects of Goldman’s consumer banking efforts is that the bank has the scale, capitalization, and brand advantages of a big bank without the legacy infrastructure (such as a branch network) to deal with. In other words, Goldman has the excellent cost advantages of smaller online banks, but with tons of capital to fuel its growth, a rock-solid brand name, and a long history of experience with solid risk management practices.
House of Dimon
Jordan Wathen (JPMorgan Chase): This bank quietly became the largest bank in the country by assets, but I see even brighter days ahead for this global banking institution.
Simple retail banking is at the core of what makes JPMorgan an extraordinary bank. From credit cards to savings accounts, JPMorgan has a relationship with roughly half of American households and more than 4 million small businesses. Its card business gives it more insight and data into the health of the consumer than virtually any other institution. The company estimates that it has 22% market share in credit card sales, a meaningful competitive advantage.
On the opposite end of the spectrum, JPMorgan has a leading corporate and investment banking franchise that ranked No. 1 in debt capital markets, No. 2 in mergers and acquisitions, and No. 2 in equity capital markets in 2017. Its scale allows the company to send a greater share of revenue into pre-tax profit, as the investment bank’s overhead ratio stood at 55% in the most recent quarter. In an industry that isn’t known for thrift, JPMorgan’s efficiency is commendable.
Ultimately, I think a combination of rising interest rates, lower taxes, and widening margins from growing scale should enable JPMorgan Chase to reliably earn a mid-teens return on tangible common equity, more than justifying its current valuation of about two times tangible book value.
Ride into the sunset with this bank stock
Dan Caplinger (Zions Bancorporation): Big banks get all the headlines, but well-located regional banks have some opportunities that even Wall Street’s finest have trouble matching. Zions has its headquarters in Salt Lake City, and that location taps into the huge growth that the American West has seen over the past decade.
The bank has taken full advantage of its growth opportunities. In its most recent quarter, Zions reported an 11% rise in net interest income, benefiting from rising interest rates, even as credit quality improved with dramatic declines in nonperforming assets and classified loans. Zions in particular has done well to keep overhead costs under control even as it grows, and gains in efficiency ratios have been especially impressive.
Shareholders have reaped the rewards. Zions has boosted its dividend for four consecutive quarters, culminating in a tripling of its payout to $0.24 per share most recently. That’s taken the bank’s yield up to a more respectable 1.7%, but Zions’ earnings give it plenty more capacity to keep boosting dividends to even higher levels.
Prospects for the Mountain West region are still favorable, and that should benefit Zions’ home territory to a greater extent than the nation overall. With favorable interest rate trends, good operational performance, and a solid customer base, Zions Bancorp is in great shape right now and looks poised to keep succeeding into the future.
10 stocks we like better than Goldman Sachs
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Dan Caplinger owns shares of Apple. Jordan Wathen has no position in any of the stocks mentioned. Matthew Frankel owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.