Analysts Pour Praise on JPMorgan, Wells Fargo (Update 1)

Updated from 8:09 a.m. EDT with comments on industry mortgage results so far from Sterne Agee analyst Todd Hagerman, along with his price target and EPS estimate increases for JPMorgan and Wells Fargo.

NEW YORK ( TheStreet) -- A chorus of analysts have raised their earnings estimates and price targets for JPMorgan Chase ( JPM) and Wells Fargo ( WFC), in the wake of strong earnings reports on Friday from both companies.

Please see TheStreet's earnings coverage for full details on JPMorgan's second quarter and Wells Fargo's results.

KBW analyst Christopher Mutascio on Sunday reiterated his "outperform" rating and raised his price target for JPMorgan's shares to $63 from $58, while raising his 2013 earnings estimate for the bank to $6.11 from $5.75 and his 2014 EPS estimate to $6.25 from $5.80. In a note to clients on Sunday, Mutascio wrote that his earnings estimate and price target increases were driven by "significantly lower net charge-off assumptions given better-than-expected credit metrics in 2Q13," as well as "better than originally anticipated trading and asset management income, and... a slightly lower-than-expected share count."

KBW's price target for JPMorgan represents "a reasonable P/E multiple of 10.0x to our 2014 EPS estimate," according to Mutascio.

Mutascio also said concerns over JPMorgan's narrowing net interest margin during the second quarter were "overblown." The margin contracted by 17 basis points during the second quarter to a low 2.20%. According to the analyst, "the vast majority of the compression was attributable to the nearly $110 billion increase in cash balances as the company chose to accelerate compliance with the proposed Basel 3 liquidity coverage rules. JPMorgan's net interest income declined to $10.7 billion during the second quarter from $10.9 billion in the first quarter. "The company's net interest income dollars did not decrease as nearly as much as the significant NIM compression would imply," Mutascio wrote.

Other analysts raising price targets for the bank included Keith Horowitz of Citigroup, who on Monday maintained his "buy" rating and raised his price target for JPMorgan Chase to $62 from $56, while sticking with his 2013 EPS estimate of $6.05 and his 2014 EPS estimate of $6.10.

"We leave 2013-2015 estimates unchanged as lower credit provisions for credit losses are offset by lower net interest income and mortgage banking and other fee income forecasts," Horowitz wrote in a note to clients on Monday. "Our estimates point to returns in the 13-15% range for the next 3 years, however, we raise our target to $62 driven by a slightly lower 12% cost of equity estimate. We continue to see good value in JPM shares," Horowitz wrote.

UBS analyst Brennan Hawken on Monday stuck with his "buy" rating for JPMorgan, while raising his price target to $62 from $57. Hawken raised his 2013 EPS estimate for JPM by a dime to $5.75, but lowered his 2014 EPS estimate by a nickel to $5.95, "driven by a lower net interest income starting point and lower mortgage revenues." In a note to clients, Hawken wrote "JPM remains the strongest franchise in the group, and we believe they should continue to take share."

Sterne Agee analyst Todd Hagerman on Monday maintained his "buy" rating for JPMorgan Chase, while raising his price target by a dollar to $65, implying a stock multiple of 10.4 times his 2014 EPS estimate of $6.30. Horowitz raised his 2013 EPS estimate by a dime to $5.90, raised his 2014 EPS estimate by 15 cents, and introduced a 2015 EPS estimate for JPMorgan of $6.80.

"Notwithstanding the challenges, with JPM trading at a discounted ~9x forward earnings, we believe the shares are poised for multiple expansion given the earnings tailwinds into '14, including expectations for an incrementally higher absolute capital return to shareholders," Hagerman wrote in a note to clients.

JPMorgan's shares closed at $54.97 Friday. The shares have returned 28% this year, following a 36% return during 2012. The shares trade for 1.4 times tangible book value, according to Thomson Reuters Bank Insight, and for 9.2 times the consensus 2014 EPS estimate $6.00. The consensus 2013 EPS estimate is $5.76.

Based on a quarterly payout of 38 cents, JPMorgan's shares have a dividend yield of 2.77%. Following the Federal Reserve's annual stress tests for the largest U.S. banks in March, the company was approved to repurchase up to $6 billion in common shares through the first quarter of 2014. JPMorgan's shares repurchases during the second quarter totaled $1.2 billion.

Wells Fargo

Mutascio reiterated his "market perform" rating for Wells Fargo, while raising his price target for the shares to $46 from $43. The analyst on Sunday also raised his 2013 EPS estimate to $3.91 from $3.74, and his 2014 EPS estimate to $4.15 from $3.93. KBW's price target for Wells Fargo represents "fail value" of 11 times the firm's 2014 EPS estimate, Mutascio wrote.

FBR analyst Paul Miller on Monday reiterated his "outperform" rating for Wells Fargo, while sticking with his price target of $50. Miller raised his 2013 operating EPS estimate for the bank to $3.74 from $3.63, and maintained his 2014 EPS estimate of $3.90. Miller in a note to clients on Monday wrote "the company reported another quarter of solid mortgage-banking results as originations remain elevated and gain-on-sale declined less than expected."

Wells Fargo also bucked the expected industry trend, with mortgage loan originations increasing to $112 billion during the second quarter from $109 billion during the first quarter.

Hagerman maintained his "neutral" rating for Wells Fargo on Monday, although he raised his price target for the shares to $44 from $42. The analyst raised his 2013 EPS estimate to $3.85 from $3.65, while raising his 2014 EPS estimate to $4.10 from $4. Hagerman also introduced a 2015 EPS estimate for Wells Fargo of $4.40.

In a note to clients, Hagerman wrote that his outlook for Wells Fargo "remains positive, but we see the shares now as largely fairly valued given our expectations for moderating growth, at least over the next few quarters."

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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-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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