Wells Fargo trades at a premium to the remaining three members of the "big four" banking club, reflecting a steadier and stronger earnings track record over the past few years, as well as the company' strong mortgage lending position. The company's operating returns on average assets (ROA) have ranged between 1.26% and 1.40% over the past five quarters, according to Thomson Reuters Bank Insight, while its operating returns on equity (ROE) have ranged between 11.51% and 12.37%. The shares closed at $35.33 Monday, trading for 2.1 times tangible book value, according to Thomson Reuters Bank Insight, and for 10 times the consensus 2013 earnings estimate of $3.66 a share, among analysts polled by Thomson Reuters.
Mosby rates Wells Fargo a "Buy," and on Monday raised his price target for the shares by two dollars, to $43, "due to our continued expectation that WFC can produce consistent double-digit earnings per share growth."
Here's a quick look at price multiples and margin developments for the remaining three of the "big four" club:
- Shares of JPMorgan Chase (JPM) closed at closed at $41.19 Monday, trading for 1.3 times tangible book value, and for seven times the consensus 2013 EPS estimate of $5.20. Over the past five quarters, the company's ROA has ranged from 0.68% to 0.99%, while its ROE has ranged from 8.25% to 11.94%. JPMorgan reported a second-quarter deposit margin of 2.62%, narrowing from 2.68% the previous quarter, and 2.83% a year earlier. Mosby in August included JPMorgan among a list of banks "most exposed to continuing continued NIM pressure," including Wells Fargo, M&T Bank (MTB) and Zions Bancorporation (ZION), but also said that "we expect all four to grow earning assets fast enough to produce positive net interest income growth." The analyst estimates that JPMorgan's net interest margin will compress by 17 more basis points, from the second quarter of 2012 through the fourth quarter of 2013.
- Shares of Citigroup (C) closed at $34.06 Monday, trading for 0.7 times tangible book value, and for 7.5 times the consensus 2013 EPS estimate of $4.53. Citigroup's ROA has ranged from 0.20% to 0.77% over the past five quarters, while the company's ROE has ranged from 2.18% to 8.41%. The company's second-quarter net interest margin was 2.81%, narrowing from 2.90% the previous quarter, and 2.82% a year earlier. CEO Vikram Pandit said during Citi's second-quarter earnings call that "despite the persistent low-rate environment, we've been able to offset spread compression with new client mandates and higher transactions volumes which have enabled us to grow earnings." Citi's net interest revenue declined to $11.6 billion during the second quarter, from $11.9 billion in the second quarter, and $12.1 billion during the second quarter of 2011, "largely due to continued declining loan balances in Local Consumer Lending" within the Citi Holdings run-off subsidiary, according to the company.
- Shares of Bank of America (BAC) closed at $9.30 Monday, trading for 0.7 times tangible book, and for 10 times the consensus 2013 EPS estimate of 91 cents. Over the past five quarters, Bank of America's ROA has ranged from a negative 1.51% - during the second quarter of 2011, when the company lost $8.8 billion, or 90 cents a share, mainly from a mortgage putback settlement with private investors -- to 1.08%. The company's ROE has ranged from a negative 15.02% to 11.21%, over the same period. Bank of America reported a second-quarter net interest yield of 2.21%, narrowing from 2.51% in the first quarter, and 2.50% in the second quarter of 2011. During the company's earnings conference call in July, CFO Bruce Thompson said "we clearly would not expect to see the decline in interest rates that we saw from the end of the first quarter to the end of the second quarter going forward." Mosby estimates that Bank of America's net interest margin will only contract by a further six basis points, through the end of 2013.
Indeed, Mosby sees a potential silver lining in the Federal Reserve's latest easing. "The interesting thing is that the yield curve steepens as you continue this process" of pushing down long-term rates. "Monetary actions when rates are this low, defend the economy, which mentally moves the investors to worrying about the monetary easing," with inflation becoming a concern, as the fear of a recession subsides.The banks that have maintained the highest net interest margins so far during this period of historically low rates are going to see increasing pressure to their net interest margins over the next year, while the ones with lower margins that have already felt the margin pain are not likely to see much further narrowing of spreads, and may even see improving margins. Here are the five large U.S. banks that Mosby estimates will face the least net interest margin compression through the end of 2013, counting down to the one name expected to show an improved margin:
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