J.P. Morgan has jumped 16% in the past three months, while Wells Fargo is up 12%.
Those gains are partly because the new Trump administration has pledged to reduce some of the previous administration’s banking regulations. Spending less on compliance would free up more cash for dividends and share buybacks.
As well, the U.S. Federal Reserve raised its benchmark interest rate in December 2016. With a stronger economy, it plans more rate hikes in 2017. That will let banks earn higher interest income on new mortgages, and car and credit card loans.
J.P. MORGAN CHASE & CO. $91 (New York symbol JPM; Income Portfolio, Finance sector; Shares outstanding: 3.6 billion; Market cap: $327.6 billion; Price-to-sales ratio: 3.6; Dividend yield: 2.1%; TSINetwork Rating: Average; www.jpmorganchase.com) is the largest banking firm in the U.S., with total assets of $2.5 trillion as of December 31, 2016.
Morgan has four main divisions: Consumer and Community Banking, including branches and credit cards (45% of 2016 revenue, 38% of earnings); Corporate and Investment Banking, including brokerage and underwriting services (35%, 43%); Asset Management (12%, 9%); and Commercial Banking (8%, 10%). About 75% of the bank’s revenue comes from the U.S. Morgan gets a higher percentage of its revenue from securities trading than, say, Well Fargo, so its results are more erratic. The bank has also sold some of its less-profitable operations over the past few years.
As a result, Morgan’s overall revenue fell 2.9%, from $97.0 billion in 2012 to $93.6 billion in 2015. Thanks partly to higher trading volumes in the lead-up to the U.S. presidential election, revenue improved to $95.7 billion in 2016.
Earnings fell from $5.20 a share (or a total of $21.3 billion) in 2012 to $4.35 a share (or $17.9 billion) in 2013. Earnings then recovered to $5.29 a share (or $21.8 billion) in 2014, and reached $6.19 a share (or $24.7 billion) in 2016.
Morgan set aside $24.7 billion in 2016 to cover potentially bad loans. That’s up 1.2% from $24.4 billion in 2015. Even so, its bad loans as of December 31, 2016, were unchanged from a year earlier at 0.77% of total loans.
Big savings with shift to mobile banking The bank continues to make progress with its plan to close branches as more of its customers do their banking online. It also continues to lay off workers and lower other costs. In all, these actions should cut $4.8 billion from Morgan’s annual expenses by the end of 2017.
The stock now trades at 13.8 times the bank’s expected 2017 earnings of $6.58 a share.
Morgan currently pays quarterly dividends of $0.48 a share; the annual rate of $1.92 yields 2.1%. Dividends equalled just 30% of its 2016 earnings, so the bank has plenty of room to increase the payout. It also repurchased $9.1 billion of its shares in 2016.
J.P. Morgan Chase is a buy.
WELLS FARGO & CO. $58 (New York symbol WFC; Income Portfolio, Finance sector; Shares outstanding: 5.0 billion; TSINetwork Rating: Average; Market cap: $290.0 billion; Price-to-sales ratio: 2.2; Dividend yield: 2.7%; www.wellsfargo.com) is the third-largest bank in the U.S. after J.P. Morgan (No. 1) and Bank of America (No. 2). Its assets totalled $1.9 trillion at the end of 2016.
The bank operates through three divisions: Community Banking provides mortgages, loans, credit cards and other financial services (52% of 2016 revenue, 54% of earnings); Wholesale Banking supplies business loans (31%, 36%); and Wealth and Investment Management offers wealth management, brokerage and trust services to individuals and institutions such as pension plans (17%, 10%).
Wells Fargo gets 95% of its revenue from the U.S.
The bank’s revenue declined 2.7%, from $86.1 billion in 2012 to $83.8 billion in 2013. Revenue then rebounded to $84.3 billion in 2014, and improved to $88.3 billion in 2016.
Earnings jumped 22.0%, from $3.36 a share (or a total of $18.9 billion) in 2012 to $4.10 a share (or $23.1 billion) in 2014. Wells Fargo’s overall earnings fell to $21.6 billion in 2015, but per-share earnings improved to $4.15 on fewer shares outstanding. Earnings then declined to $4.06 a share (or $20.4 billion) in 2016.
The bank set aside $3.8 billion for potential bad loans in 2016, up 54.4% from $2.4 billion in 2015. That increase reflects Wells Fargo’s 2015 purchase of both the commercial lending and leasing operations of General Electric Co. (New York symbol GE). Those businesses offer loans to help manufacturers boost their inventory as well as other forms of financing.
Even with the higher provisions, as of December 31, 2016, Wells Fargo’s bad loans fell to 1.17% of its loan portfolio from 1.40% a year earlier.
In addition, the bank recently paid a $185 million fine to settle charges that its employees opened 2 million unauthorized deposit accounts and credit cards. That helped those workers meet internal sales targets and qualify for bonuses. Wells Fargo has since fired the employees who falsified documents and has strengthened its internal oversight procedures.
Strong brand should survive scandal The scandal seems to have had little impact on the bank’s ability to attract new customers. Total loans as of December 31, 2016, were $967.6 billion; that’s up 0.7% from three months earlier. Deposits, in fact, rose 2.4%.
The stock now trades at 13.9 times the $4.18 a share Wells Fargo will probably earn in 2017. The $1.52 dividend yields 2.6%. Dividends equalled 37% of the bank’s earnings in 2016.
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