Moats Widen for JPMorgan and BofA
We believe the U.S. banking system is much stronger and more stable than it was a decade ago.
After an extensive review of the competitive positioning of the big four U.S. money center banks, we have upgraded our economic moat ratings for JPMorgan Chase (JPM) and Bank of America (BAC) to wide and maintaining our moat ratings for Wells Fargo (WFC) at wide and Citigroup (C) at narrow.
We believe it is appropriate to upgrade some of the moat ratings for the largest U.S. banks. This is based on a stronger, more stable U.S. banking system as well the increasing importance of size and scale. We believe the U.S. banking system is much stronger and more stable than it was a decade ago, leaving more room for wide moats among the best-positioned banks. This is due to the higher capital levels present in the system as well as the regulatory reform that has reduced or eliminated some of the riskier banking activities at the money center banks.
A decadelong period of regulatory reform and capital building is now behind us. The rapid growth of technology solutions in banking should allow the largest banks to focus on more efficient and more profitable product distribution, creating product offerings on a national and even international scale. The shift from defense to offense should allow the largest banks to finally be able to focus on maximizing the value of their own franchises, largely based on scale and economies of scope advantages. The largest banks also have the biggest technology budgets. While absolute technology spending is not the be-all end-all metric for technology advantages, we believe it will certainly help over the long run.
We see JPMorgan, Bank of America, and Wells Fargo as all having strong individual franchises across multiple product categories. However, we believe there are advantages to combining them all under one banking roof. These banks are better able to cross-sell, provide advantaged pricing, and spread customer acquisition costs across more revenue streams. Therefore, we see each of them as worthy of a wide moat rating.
JPMorgan is the largest U.S. money center bank by assets and tends to have leading share and operations in almost all of the areas it competes. It often has the leading franchise or one of the leading franchises in almost any banking product available. JPMorgan is particularly strong in investment banking, cards, asset management, and retail household reach. Bank of America is similar, with leading or top-tier franchises across the industry. We highlight the bank’s Merrill Lynch franchise, strength in cards, and overall mortgage and deposit-gathering capabilities. While Wells Fargo has run into numerous issues over the past couple of years, the bank still has the most comprehensive branch network in the United States, is still a leading deposit gatherer, has a large advisory network, and has particular commercial strength in the middle market. We mention these highlights to emphasize that each of these banks has individual segments that are strong in their own right.
While all of these segments are strong on their own, we believe there are advantages to combining them all under one banking roof. 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 existing and new markets in an effort to win new business. Over time, we see a bifurcation between the banks that have the most scale, most complete product stacks, and most advanced technology backbones, and those that do not. We believe JPMorgan, Bank of America, and Wells Fargo are likely to be in the first group.
There are still many threats facing the banks, most notably through technological disruption. We think deposit insurance and regulatory factors still provide a formidable barrier to entry for potentially disruptive competitors, however. While there is possibly room for some disruption in the more tangential aspects of banking, such as payments, the core functions of being able to hold deposits and having direct access to the banking system are still well protected. Also, the more a company begins to look like a bank, the more likely it is that the government will eventually step in, as we believe regulators want a transparent and controlled financial system that is largely under their purview.
We believe that the pure scale of the largest banks’ operations will be tough to match, their technology spending will not make them easy targets, and the fact that the banks already own decades’ worth of data and all the key relationships will further increase their ability to withstand disruption. We also see the banks working together whenever something is perceived as a threat to the industry in general, such as through the creation of Zelle.
The biggest threat we see would be if a competitor with already existing scale, technological capabilities, and name recognition stepped into the banking industry. The most obvious candidate fitting this description would be Amazon, but we don’t see it wanting to become a regulated bank anytime soon. Overall, given the tech budgets the largest banks have, we believe they already are investing to stay abreast of the latest fintech developments and in many cases are even beginning to use them to their advantage.
Eric Compton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.