U.S. banks off to strong start; Wells undervalued

A strong economy has led to strong early results from banks, and we see value in Wells Fargo.

Jim Sinegal 17 April, 2018 | 5:00PM
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Jim Sinegal: It's starting off to be a great quarter for banks. For example, JPMorgan is now firing on all cylinders. They reported a 19% return on tangible equity; that's two percentage points above their long-term targets of 17%.

One of the factors that's been helping is the economy is performing very well. Credit quality is excellent. JPMorgan charged off essentially zero commercial loans, so perfect credit quality this quarter.

The markets have also helped. The markets are remaining at very high levels, yet volatility is up, so the trading businesses did very well. The tax cuts have also benefited the banks. A lot of those benefits we expect to be competed away over time, but they're now dropping down to the bottom line.

We actually increased our fair value for JPMorgan on the results to US$103, yet the stock is still trading slightly above that. The company is doing great, but you're paying a high price for those results.

On the other hand, Wells Fargo is still suffering a bit from the effects of the sales scandal. They're under a regulatory consent order that's limiting their growth. They have another big fine from the Consumer Financial Protection Bureau coming up, and their expenses are exceptionally high.

However, we like Wells Fargo's valuation. The dividend yield is high. Capital levels are also very high. They should be able to return more of that capital to shareholders over time. You've seen other banks, such as B of A and Citigroup dramatically improve their operations over the last decade. Over time, Wells should be able to do the exact same thing.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Bank of America Corp39.29 USD0.18Rating
Citigroup Inc64.07 USD-0.11Rating
JPMorgan Chase & Co204.79 USD1.15Rating
Wells Fargo & Co61.08 USD0.03Rating

About Author

Jim Sinegal

Jim Sinegal  Jim Sinegal is a senior equity analyst for Morningstar.

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