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Wells Fargo Again Proves It's Better Than JPMorgan

Updated with additional details in second and seventh paragraphs.

NEW YORK (TheStreet) -- Bank earnings are complicated, but it's important not to lose the forest for the trees. Wells Fargo  (WFC) grew its earnings; JPMorgan Chase  (JPM) did not. Which do you think is the better performer?

It isn't a trick question. JPMorgan on Friday attributed its 18% first quarter earnings decline to "industry-wide headwinds in markets and mortgage." Fine--except that Wells Fargo is in the same industry and managed to grow its earnings by 14%. And it's not as though Wells Fargo looks good this quarter because it is coming off a poor prior performance. Wells posted higher net income than any other bank in the U.S. in 2013 and has grown earnings for 17 straight quarters.

Even though residential mortgage originations fell slightly at Wells Fargo compared to the fourth quarter, the San Francisco-based bank managed to more than offset the decline by fees from mortgage servicing.


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JPMorgan Chase CFO Marianne Lake instead complained about "severe weather" during Friday morning's conference call. And, while she conceded the bank lost market share, she argued it was because it is more disciplined than competitors.

"We're pricing the business to reflect the inherent risks. The risk of default and the cost associated with servicing defaulted loans is significantly higher for high LTV loans. As a result of pricing actions taken we believe we may have lost some share in the first quarter. But we will remain disciplined with respect to appropriate risk-adjusted returns," Lake said.

If JPMorgan wants to blame its performance on the fact that it is more "disciplined" than competitors, that's fine as far as it goes. There will always be another player out there pushing the envelope more than the country's largest bank. But you won't find many people willing to argue that JPMorgan -- the bank that brought you the London Whale trading debacle -- is more disciplined than Wells Fargo.

The market understood that JPMorgan was riskier than Wells Fargo going into Friday's earnings, and on Friday it is charging an ever higher price for the relative stability of Wells. Wells trades at about 1.6 times book value versus 1.1 times book for JPMorgan. Part of that discount is attributable to JPMorgan's riskier "business model." It still takes more market risk even though the Volcker rule is supposed to reduce such risk-taking. Also, JPMorgan has a much larger presence outside the U.S.

But when it comes to which bank is better at delivering consistent profits, there can be little debate: one bank has excuses, the other has results.

Follow @dan_freed

 

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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