Big Four Money Centers Have Different Strategies

The general belief expressed by financial analysts and journalists is that there is little substantive difference in the day to day operations of U.S. money centers, especially those four institutions with assets of more than $1 trillion each: JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC), and Citigroup (C).

The idea is that not only are they too big to fail but also too big to manage and that as such they all do pretty much the same things with their relative performance being determined by how well they do them and the aggregate strength of the economy overall.

Their individual balance sheets however do not reflect this and instead indicate that each is staking out very different strategies with respect to management of their balance sheets and core operations.

As the U.S. Treasury yield curve steadily flattened with both short and long end yields declining since the failure of Lehman Brothers each of these institutions shifted their balance sheets away from U.S. Treasuries and agency debt and toward riskier assets such as municipal bonds, mortgage backed securities and foreign debt. Although there are other categories for our purposes here I will limit the discussion to these areas.

Wells Fargo and Bank of America have and are implementing a strategy that is almost exclusively about and in support of the residential mortgage business. There is also little indication of trading activity in any of their core securities holdings.

Bank of America has been much more singularly focused on this area than has Wells Fargo. Bank of America has concentrated 18% of the securities they hold into MBS; up from about 13% four years ago. Wells Fargo and Citigroup have remained constant at about 10% and 4% of their securities holdings, while JPMorgan's holdings of MBS's declined to 8.5% from about 11%.

Although Wells is maintaining a strong and growing position in MBS it has also increased its holdings of municipal and foreign debt dramatically from about 0.5% of assets to 2.3% and from about 0.6% to 1.5% respectively.

Bank of America on the other hand reduced its holdings of municipal debt from about 0.5% to 0.1% of their portfolio and maintained about 0.4% of their portfolio in foreign debt.

Bank of America is managing itself exclusively to the performance of the housing market with almost no hedging and little trading being used to boost performance. As goes housing, so goes Bank of America.

JPMorgan has and is taking a different tack. Although their holdings of municipal debt increased over the past 4 years from about 0.2% of their portfolio to about 1% and rising, their holdings of MBS have fell over that same period of time from about 11% to 8.5%.

JPMorgan has and is shifting assets increasingly into foreign debt with that percentage increasing from about 4% to 6% in the past four years. In comparison foreign debt at Bank of America is at about 0.4%, at Citigroup it is about 5.5% but declining from about 8% when Lehman failed, and at Wells Fargo there's been a slight increase from about 0.6% to 1.5%. As goes the Europe, so goes JPMorgan.

JPMorgan, Wells Fargo and Citigroup have all increased their holdings of municipal debt in the U.S., while Bank of America has decreased theirs.

Citigroup is the only money center that has markedly increased its U.S. Treasury holdings over the past four years; more than doubling from about 2% to about 4.2%.

In comparison Bank of America and JPMorgan maintained their exposures close to 1.2% and 0.4% respectively. Wells Fargo has almost no treasuries.  

In general this is what it means: JPMorgan has the most foreign exposure; Bank of America has the most concentrated exposure (in mortgages), Wells Fargo has the most balanced exposure, and Citigroup has the most conservative balance sheet. 

At the time of publication the author held a position in JPM bonds.