Wells Fargo and J.P. Morgan passed the Federal Reserve’s latest “stress test,” which measures how well financial firms would cope with a sharp jump in unemployment, falling stock prices and other unfavourable conditions.
Here is our analysis of the two banks, both of which we cover regularly in our advisory on U.S. stocks, Wall Street Stock Forecaster.
WELLS FARGO & CO. (New York symbol WFC; www.wellsfargo.com) saw its revenue fall 3.0% in the first quarter of 2014, to $20.6 billion from $21.3 billion a year ago. Interest rates have crept up, which has dampened demand for new mortgages and led fewer homeowners to refinance.
However, the bank continues to do a good job of screening potential borrowers. As a result, it has been setting aside less money to cover bad loans. In the latest quarter, Wells Fargo’s loan-loss provisions fell 73.3%, to $325 million from $1.2 billion. The bank is also cutting jobs at its mortgage business in response to slowing demand.
Thanks to these measures, its earnings in the latest quarter rose 14.0%, to $5.9 billion, or $1.05 a share. It earned $5.2 billion, or $0.92 a share, a year earlier.
The bank also raised its quarterly dividend by 16.7% to $0.35 a share. The new annual rate of $1.40 yields 2.8%.
Dividend stocks: Morgan Chase aims to buy back $6.5 billion of its shares in the next year
J.P. MORGAN CHASE & CO. (New York symbol JPM; www.jpmorganchase.com) earned $5.3 billion, or $1.28 a share, in the three months ended March 31, 2014. That’s down 19.2% from $6.5 billion, or $1.59, a year earlier. Revenue fell 8.5%, to $23.0 billion from $25.1 billion.
Even though interest rates remain relatively low, the slow economy has hurt consumer and business loan demand. As well, revenue from Morgan’s securities trading operations (which account for 37% of the total) fell 15% on weaker volumes. These were the main reasons for the lower results. In addition, Morgan set aside $850 million to cover bad loans, up 37.8% from $617 million a year earlier.
Morgan continues to sell its riskier businesses, including its commodity-trading operations, which buy and sell resources, such as oil, metals and crops. It will receive $3.5 billion when the deal closes in the third quarter of 2014.
The bank plans to buy back $6.5 billion of its shares in the next year. The $1.60 dividend yields 2.9%.
In the latest edition of Wall Street Stock Forecaster, we examine the earnings outlook for both of these banks and whether they can continue raising their dividends. We also consider their prospects for share buybacks. We conclude with our clear buy-hold-sell advice on this stock.
If you’re a member of Pat’s Inner Circle and you’d like to ask a question about today’s article, please go to the question page reserved for you (be sure you’re logged in first). Click here to ask your question.
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