NEW YORK (
are both considered the healthiest among the U.S. banks. But which of these stocks will be the safer bet in 2012?
For now, it looks like JPMorgan is the analyst favorite, with 29 out of 32 analysts rating the stock a buy according to Reuters data. The other three analysts have a hold rating.
While the outlook for Wells is also bullish, some are less optimistic about the stock given its relatively rich valuation versus the sector. Wells trades at 157% its tangible book value per share, compared to 102% in the case of JPMorgan. Several large-cap bank stocks including
Bank of America
trade at deep discounts to book value.
25 out of 34 analysts have a buy rating on Wells Fargo, reflecting overall bullishness. Eight analysts rate the stock a hold, while one analyst has a sell on the stock. Wells also has the backing of billionaire investor
Warren Buffett, which has added to its appeal.
Wells commands a strong premium relative to JPMorgan in part because of its low exposure to the volatile capital markets business. Depressed trading and deal activity hurt the "universal" banks in the second half of 2012, with concerns about the impact of the Volcker rule on banks' trading activity also depressing stocks.
Wells Fargo shares have shed only about 10% in 2011, compared to JPMorgan's 21% drop.
While investment banking is among the fastest growing businesses for Wells Fargo , analysts say it is still little more than a "rounding error" for the bank.
CFO Tim Sloan told
in a recent
interview that the reason the stock commanded a premium over JPMorgan was because of its diversified business model. "I think one of the reasons we're trading at a premium--and I don't want to bad mouth JPMorgan because I think it's a very well run firm and a very effective competitor--but I think that one of the reasons we trade at a premium is we have a very diversified model, meaning that we've got a lot of businesses. None in particular is so great or so large that it creates a lot of volatility in our earnings stream," he said.
"When you look at our loan portfolio, it's about 50/50--well maybe 55/45 consumer to wholesale. You look at how we generate income it's about 50/50 between loan spread and securities spread and fees. You look at our fee income and it's very diversified across different fee types. That's why I think we are viewed as trading at a premium versus others."
Both banks have expressed a desire to return more capital to shareholders in 2012 even as they continue to build capital levels in keeping with Basel III levels. Both banks will also have to hold capital buffers over and above the Basel II standards as they are deemed "Global Systemically Important Financial Institutions" - those too big to fail.
Still, JPMorgan will likely be forced to hold much higher capital because of its more global and complex business model compared to Wells, which is more of a traditional bank focused predominantly in the U.S. That could put Wells at an advantage as it has relatively more flexibility when it comes to deploying capital and snapping up assets.
However, Wells could be more vulnerable if the U.S. recovery, already just muddling along, stumbles yet again. And with valuations well above peers, there isn't too much room for disappointments.
Which stock would you rather buy at these levels? Vote in our poll.
--Written by Shanthi Bharatwaj in New York
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