JPMorgan Chase Trades at a Big Premium to Bank of America. Is It Worth the Difference?

JPMorgan Chase (NYSE: JPM) is a driving force of the broader economy. And the gigantic bank has been a huge winner thanks to strong fundamental performance. During the past decade, its shares have generated a total return of 527% (as of June 8). That gain comes up well ahead of smaller rival Bank of America (NYSE: BAC), whose shares delivered a total return of 369% during the same time.

From the market's perspective, investors might struggle to find differences between these two companies. After all, they each have a meaningful presence in different areas of the financial services sector.

But JPMorgan Chase trades at a price-to-book (P/B) ratio of 2.4, representing a sizable 71% premium to Bank of America's 1.4 multiple. What's causing this large valuation gap? And does it tell us anything about the investment implications of these two financial stocks?

Image source: JPMorgan Chase.

The key performance metrics paint a clear picture

There are numerous variables investors can examine to understand why the market values JPMorgan Chase at a significant premium to its banking counterpart. Let's start with some key financial metrics.

JPMorgan Chase's return on tangible common equity (23%), efficiency ratio (54%), and net profit margin (33%) in the first quarter were all better than what Bank of America reported.

JPMorgan Chase has a stronger market position in areas that generate non-interest fee income, adding stability. It collects much greater revenue from activities like investment banking and asset management.

To Bank of America's credit, it has the leading market share in the U.S. consumer deposit market. But JPMorgan Chase's total deposit base of $2.7 trillion is larger in an absolute sense. Nonetheless, the spread between what it earns on interest-bearing assets and what it pays on interest-bearing liabilities of 2.01% is 46% higher than Bank of America's 1.38%. This supports a cost advantage.

Leadership has an impact

These are no doubt important metrics to pay attention to, and they highlight the superior operations of JPMorgan Chase. But investors will also want to take a closer look at their management teams, specifically the chief executive officers (CEO).

Jamie Dimon has been the CEO of JPMorgan Chase since 2006. He gets a lot of credit for successfully navigating the business through the 2008 financial crisis, which decimated the entire industry, without needing a government bailout. This sharpened the company's stringent risk management practices.

He also managed through acquisitions and directed technology investments to make JPMorgan Chase the biggest bank in the U.S. Dimon is one of the most highly regarded corporate leaders in the world.

Brian Moynihan deserves praise as well, having been the CEO of Bank of America since 2010, when it was in a troubled state. He turned the company into a highly profitable and tech-forward financial institution.

However, he doesn't have the same public visibility and investor appreciation that Dimon does, which might also be a contributing factor to his stock's valuation.

What's the opportunity for investors?

In addition to JPMorgan Chase's more favorable financial metrics, its profit gains also stand out. During the past decade, the company's diluted earnings per share climbed at a compound annual rate of 12.8%. That's faster than Bank of America's yearly clip of 11.3%.

Taking everything into account, it makes sense why JPMorgan Chase trades at a notable premium to its industry peer. Any rational investor would conclude that it's deserving of the valuation. Its robust position in non-interest and fee-generating activities, greater scale, and better profits support this view.

But does Bank of America's discount mean that there's a buying opportunity here? Not necessarily, because the market isn't automatically going to bid up this bank stock's valuation to match JPMorgan Chase's P/B ratio.

For investors seeking adequate exposure to the financial services industry as part of a diversified portfolio, owning both companies is a reasonable approach.

JPMorgan Chase is an advertising partner of Motley Fool Money. Bank of America is an advertising partner of Motley Fool Money. Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.