This Big Bank is Just Too Cheap
Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Wells Fargo (NYSE: WFC) has been an American business icon since 1852 and has fueled economic growth since the Gold Rush. It is the fourth largest bank in the US by assets, providing retail and commercial banking, along with wealth, brokerage, and retirement management services. These and other financial service are available in over 130 countries.
Overall, Wells Fargo is the 26th largest corporation in America according to Fortune. In 2007, before the recession, Wells Fargo was the only bank in the United States with a AAA credit rating by the S&P 500. Since then, they were dropped to AA- and then to A+, which is still a very high and respectable rating. During the financial crisis, Wells Fargo received $25 billion in TARP funds from the U.S. government, which they paid back in December of 2009. After getting this weight off their back, they have been on a tear.
Wells Fargo reported upbeat fourth quarter 2012 earnings in January. They reported record earnings of $5.1 billion, a 24% increase from the fourth quarter in 2011. They also reported record diluted earnings per share of $0.91, a 25% increase from 2011. Total revenue increased 7%, and more capital was returned to shareholders via an increased dividend. Numbers like these are what investors crave from a company.
Investment banking has been a major source of Wells Fargo's growth. They charge for their services in the form of fees including upfront, retainer, and success fees. These fees grew 30% year-over-year from commercial and corporate bankers. As of January, they own a 5.1% share of the United State's investment banking market. With the strength in the market, this segment is sure to continue its growth.
For community banking, consumer checking was flat, while business checking rose 3.7% year-over-year. Credit card penetration rose to 33.1%, auto originations rose 8%, and mortgage originations rose 4%. In the wholesale banking segment, commercial card use rose 25%, and total assets under management rose to $451.8 billion. Retail brokerage, wealth management, and retirement accounts reported a record net income up 13%. Retail brokerage accounts assets grew 20%, mainly due to the strong market performance. Wealth management assets rose 3% and IRA assets grew 11%. Wells Fargo has kept these segments growing consistently, and this will be key in keeping their market share rising.
This bank has one of the most diverse fee generation structures you will find. This is important because it prevents them from relying on any one business segment to generate income. Rather than explain the breakdown in words, take a look at this chart:
The Big 4
JPMorgan Chase (NYSE: JPM), Bank of America (NYSE: BAC), Citigroup (NYSE: C), and Wells Fargo make up the four largest banks in the United States. JPMorgan Chase was formed when J.P. Morgan & Co. merged with Chase Manhattan in 2000. They have global operations specializing in investment banking, retail and commercial banking, asset management, and private equity. They own the #16 spot on the Fortune 500's largest corporation list and grew earnings 19.5% in 2012, and they are expected to grow another 8.3% in 2013.
Bank of America provides various banking and financial products to over 57 million consumers and businesses in the United States. They offer their services in over 40 others countries as well. They are the largest wealth management corporation in the world, and they gained this title after acquiring Merrill Lynch in 2008. As of 2012, they are the 13th largest corporation in the United States. Their stock plummeted over 60% in 2011 and has been on the rise since the start of 2012. They reported annual earnings per share of $0.25 in January and are expected to bring in $1.00 in 2013. This is incredible growth, so if they can make it happen they are set to soar.
Citigroup's holdings include over 200 million customer accounts in 160 countries, making them a worldwide powerhouse. Citi is the 20th largest corporation in the U.S. and provides a broad range of financial products and services, which are very similar to the other banks in the Big 4. They are down a horrible 84% since their high in 2008, before the financial crisis, making them the worst performer of the group. This also means they potentially have the largest amount of room to run over the next few years. Citigroup had the smallest earnings growth in 2012, coming in at just 6.3%. However, analysts see a strong growth of 19.9% in 2013.
Strong earnings growth is expected of Wells Fargo over the next several years. Analysts project earnings per share of around $3.65 in 2013, an 8.3% growth from 2012. They are then projected to grow another 6.6% in 2014 and 6.2% in 2015. These are only the current estimates, and I believe they are much too low. In fact, Wells Fargo has increased quarterly earnings year-over-year for 10 consecutive quarters, dating back to the third quarter in 2010.
Management raised Wells Fargo's dividend by 14% in January, bringing it to $0.25 quarterly. This represents a yield of 2.85%, which makes them the highest yielder of the Big 4. JPMorgan comes close with a healthy 2.5% yield, while Bank of America and Citigroup are under 0.40%. Wells Fargo's dividend has been on the rise since 2010, and with consistent growth in earnings, it should continue to increase.
The Foolish Bottom Line
There is huge opportunity in the financial industry, and Wells Fargo is my top play. JPMorgan Chase is my second best bet, followed by Bank of America and Citigroup. With banks being the primary reason for the financial crisis and recession, they still have the most to prove and trust to gain. I believe Wells Fargo will continue to grow and return value to its investors. In fact, after writing this article, I was so convinced it was going higher that I bought shares in this company myself. This stock is a strong buy.
JoeySolitro1 owns shares of Wells Fargo. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup Inc , JPMorgan Chase & Co., and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!