Analysts Pour Praise on JPMorgan, Wells Fargo (Update 1)
Wells Fargo closed at $42.63 Friday. The shares have returned 27% during 2013, after returning 27% last year. The shares trade for 1.8 times tangible book value, and for 10.9 times the consensus 2014 EPS estimate of $3.93. The consensus 2013 EPS estimate is $3.74.
Wells Fargo pays a quarterly dividend on common shares of 30 cents, for a yield of 2.81% at Friday's close. The company was approved in March by the Federal Reserve for "a proposed increase in common stock repurchase activity for 2013 compared with 2012." Wells Fargo's share buybacks during 2012 totaled $3.9 billion. The company on Friday reported it had "Purchased 26.7 million common shares in 2Q13 and entered into a $500 million forward repurchase transaction which is expected to settle in 3Q13 for an estimated 13 million shares."
Investors Have Rewarded Wells Fargo
The considerably higher price-to-tangible-book and forward price-to-earnings ratios for Wells Fargo reflect a lower risk-profile, especially in the eyes of regulators and politicians still fixated on JPMorgan's "London Whale" hedge trading losses of at least $6.2 billion last year.
Wells Fargo has also been a stronger overall earnings performer over the past several years. The company reported a 1.52% return on assets (ROA) for the first half of 2013, with a return on tangible common equity (ROTCE) of 17.22%, according to Thomson Reuters Bank Insight. JPMorgan reported an ROA for the first half of 2013 was 1.11% and a ROTCE of 17%.Wells Fargo's slightly lower ROTCE during the first half reflects the company's stronger capital position. The firm's tangible common equity ratio was 8.7% as of June 30, according to Thomson Reuters Bank Insight, compared to a ratio of 6.19% for JPMorgan. Over the past four full years, Wells Fargo's ROTCE has ranged from 14.89% to 16.95%, according to Thomson Reuters Bank Insight, compared to a range of 10.66% to 14.92% for JPMorgan Chase. JPMorgan has upped its game this year, with strong trading revenue during the second quarter and significant releases of loan loss reserves, but even CEO James Dimon agrees that the bank hasn't been much of a competitor with Wells Fargo in the mortgage lending business. But in his interview with Jim Cramer on Friday on CNBC, Dimon said "we [have] a new management team in place, and at the end of the day we're going to have a great mortgage business." Hagerman on Monday wrote that "the more onerous provisions of Basel III and [mortgage servicing rights] were kept in by the Treasury [when final industry capital rules were published] and we would look for an additional wave of [large sales] of servicing books by either year end or in the spring of 2014." The potential (or probable) sale of mortgage servicing rights is not reflected in Hagerman's earnings estimates, but the profit potential for large-cap U.S. banks is enormous. "The total volume of servicing held by regional banks with MSRs that equaled more than 10% of tier 1 capital was $243.6 billion at the end of March."
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