Despite the worst being behind us, many investors still aren’t sure how profitability shakes out in light of regulatory changes.
As a result, big bank earnings came and went last week without much attention. Overall, it was a disappointment, as low interest rates continue to hamper many of the banks’ earnings growth.
But the financials have offered some of the greatest value opportunities we’ve seen in a long time following the financial crisis. And over the last three years, the Financial Select Sector SPDR Fund (NYSEArca: XLF) has outperformed the S&P 500.
Since the start of 2009, both Wells Fargo (NYSE:WFC) and JPMorgan Chase (NYSE:JPM), have surged more than 100%. Meanwhile, some of the other big bank stocks that took a much greater pounding during the financial crisis have yet to recover. This includes both Citigroup (NYSE: C) and Bank of America (NYSE:BAC), which are down 20% and up 20%, respectively, since the start of 2009.
Many investors have tried to convince themselves that underperforming big banks are value opportunities. Now, the big question is: Are big banks really offering the same great value opportunities we saw in 2008 and 2009? Possibly, but the beauty here is that you can invest with a lot less risk and uncertainty.
The only two worth focusing on remain Wells Fargo and JPMorgan. These two are well positioned and are still trading at valuation discounts larger than what we saw prior to the financial crisis.
The key difference for these two big banks is that Wells Fargo is trading at a richer valuation, but for good reason.
|Wells Fargo||JPMorgan Chase|
|Market cap||$279 billion||$236 billion|
|Return on equity||12.9%||10.2%|
|Return on assets||1.3%||0.9%|
Wells Fargo is more expensive in terms of price-earnings and price-to-book ratios, but mainly because it’s generating superior returns. Hands down, Wells Fargo is one of the best banks in the business, but what really matters is the future growth.
The Issue With Owning JPMorgan
JPMorgan is still a solid bank with the same fundamentals that limited credit losses during the financial crisis. The bright spots for JPMorgan are strong loan growth and its commitment to reining in expenses.
However, it’s still paying for other’s mistakes, including Bear Stearns and Washington Mutual. It also has some headwinds that it’s facing in capital markets businesses, which led to weaker-than-expected revenues last quarter.
Filling CEO Jamie Dimon’s shoes while he undergoes treatment for throat cancer will be a tough task as well. JPMorgan has lost a number of top managers over the last few months.
The Best Big Bank Stock
The nice thing about Wells Fargo is that it’s been growing revenues despite low interest rates, due to its strong position in mortgage lending and originations.
Unlike other big banks, it’s managed to sidestep having to make large divestitures or pay sizable compliance costs.
Wells Fargo also has one of the best balance sheets in the industry, with nonperforming loans making up less than 1% of its overall asset base.
Because of that, Wells Fargo was able to take advantage of General Electric’s (NYSE: GE) need to divest its GE Capital lending arm.
Wells Fargo bought GE’s rail leasing and asset-based lending businesses, which should provide another key growth opportunity.
Investors shouldn’t be afraid of Wells Fargo’s premium valuation, as it has the industry’s best returns on capital and a clean balance sheet.
This article is brought to you courtesy of Marshall Hargrave from Wyatt Research.