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NEW YORK (
Wells Fargo (WFC - Get Report) continually posts stronger earnings, but
JPMorgan Chase (JPM - Get Report) trades at much lower multiples, so what are investors to think following last week's trading debacle?
More than one analyst has named Wells Fargo as a safe haven amid the fallout from JPMorgan Chase CEO James Dimon's announcement late Thursday of a $2 billion second-quarter trading loss tied the company's hedging activities, and with JPMorgan's shares falling 12% over the past two sessions since the announcement, Wells Fargo has certainly been the safe holding over the short haul, with shares declining only 2% over the same period.
But for long-term investors, both names have plenty of appeal.
JPMorgan Chase CEO James Dimon
Both companies have seen very significant expansion of their domestic banking franchises, though opportunistic acquisitions during the credit crisis.
JPMorgan Chase scooped up the failed Washington Mutual in September 2008, paying the Federal Deposit Insurance Corp. $1.9 billion, while expanding into California, Florida and Washington, and strengthening its branch presence in many other key states. Wells Fargo purchased Wachovia at the end of 2008, after the troubled Charlotte, N.C., lender was pushed by regulators to sell, paying $15.1 billion to double in size, while trumping an earlier bid by
Citigroup (C). Wells Fargo also diversified its revenue stream by greatly expanding its brokerage business through the acquisition of Wachovia Securities.
Wells Fargo has been the stronger and more consistent earning performer according to data supplied by Thomson Reuters Bank Insight, with operating returns on average assets (ROA) ranging from 1.21% to 1.30% over the past five quarters, with returns on average equity (ROE) ranging from 11.51% to 12.02%. Analysts and investors also have an easier time with Wells Fargo than they do with JPMorgan Chase, Citigroup and Bank of America, since those three use debit and credit valuation accounting (
DBA/CVA), which distorts earnings with non-cash items each quarter, while Wells Fargo wisely chose not to follow this path in 2007.
For JPMorgan Chase, with greater earnings volatility because of wide swings in trading revenue, the ROA has ranged between 0.68% and 1.06% over the past five quarters, with ROE ranging from 8.16% to 12.54%.
Wells Fargo CEO John Stumpf
Both companies appear ready to comply with Basel III capital rules years in advance, with Wells Fargo estimating a Basel III Tier 1 common equity ratio of 7.81% as of March 31, while JPMorgan's estimated Basel III ratio as of March 31 was reduced to 8.2% from 8.4%, when the company announced the second-quarter trading loss.
Here's a quick look at stock performance, price ratios and analyst sentiment for both companies: