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The Long-Term Case for Wells Fargo and U.S. Bancorp (Update 2)

Updated from 11:13 a.m. ET with market close information and comment from JPMorgan Chase analyst Vivek Juneja.

NEW YORK ( TheStreet) -- "Past performance does not guarantee future results."

How many times have you read or heard this irritating but accurate disclaimer?

It's true, of course, but when it comes to considering long-term investments in bank stocks, looking at past performance can be very useful. After all, the industry is still emerging from the earth-shattering crisis of 2008.

Earnings season for the nation's largest banks begins on Friday, with JPMorgan Chase (JPM - Get Report) and Wells Fargo (WFC - Get Report) scheduled to announce their first-quarter results before the market opens. Citigroup (C - Get Report) will report on April 15, and then Bank of America (BAC - Get Report) will round out the "big four" U.S. bank holding companies with its first-quarter earnings announcement on April 17.

So over the next two weeks, we will see breathless headlines saying whether or not the big banks have beaten quarterly earnings estimates. Then the sell-side analysts will make adjustments to their 2013 and 2014 earnings estimate and price targets. Most of the price targets have 12-month outlooks, with some analysts going out to 18 months.

The headlines are geared toward day-traders, and even the "long-term" price targets of the analysts are not for periods that have traditionally been considered long-term for the average investor.

Being a day-trader is wonderful, especially if you are a successful one. But for the average investor, a solid, truly long-term investment in a company with a consistently high return on equity can only bear fruit over a period of many years.

When we look at the big banks, while acknowledging that past performance cannot guarantee future results, the "past" for this industry has been pretty lousy, and good performance during the doldrums of the credit crisis can at least point to a comforting tradition for solid management.

According to data supplied by Thomson Reuters Bank Insight, Wells Fargo's return on average tangible common equity over the past five years has ranged from 7.15% to 16.95%. JPMorgan was the only other member of the big four club that also managed to achieve positive returns on tangible equity during that period, ranging from 6.55% to 14.92%.

Even if we leave out the "bad year" of 2008, a comparison of returns over the past four years for the big four, is striking:
  • Wells Fargo's annual returns on average tangible common equity over the past four years have ranged from 14.89% to 16.95%.
  • JPMorgan Chase's ROTCE has ranged from 10.66% to 14.92% over the past four years.
  • Citigroup's ROTCE has ranged from a negative 1.50% (in 2009) to a positive 8.61%, over the past four years.
  • Bank of America's ROTCE has ranged from a negative 1.62% (in 2010) to a positive 4.46%, over the past four years.

Only JPMorgan Chase comes close to Wells Fargo's performance among the big four, and it achieved a ROTCE of 14.92% in 2012 despite the "London Whale" hedge trading losses that came to at least $6.2 billion. But the company did face plenty of disruption in the wake of the trading losses, including the suspension of share buybacks in May 2012 and the recent grilling of current and former officers by the Senate Permanent Subcommittee on Investigations. The buybacks were resumed during the first quarter.

Wells Fargo has been able to achieve its strong performance despite more than doubling in size when it purchased the troubled Wachovia at the end of 2008.

Among the nation's banks, if we stick with the ones achieving double-digit returns on tangible equity over the past four years, U.S. Bancorp (USB - Get Report) of Minneapolis is the star performer, with ROTCE ranging from 14.18% to 22.39%. And during the crisis year of 2008, the company achieved a return on average tangible common equity of 23.09%.
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BAC $14.10 0.36%
C $44.41 0.41%
JPM $61.60 0.59%
WFC $49.03 0.14%
USB $41.77 0.29%


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