The Two Best Big Banks - Scorecard
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I'm sure there are people who would argue with my title for this post. I know there are other quality banks, but overall I think you can make a very good case that JPMorgan Chase & Co (NYSE: JPM) and Wells Fargo (NYSE: WFC) are the most well managed big banks in the country. Both banks have come through the “Great Recession” in better shape than most of their competition. It's great that both companies have been doing well. However, what we want to know is which one deserves your investment dollars. We'll keep score as we go along to see which of these banks comes out on top.
Let's compare the two companies and see which one seems better positioned to profit going forward.
It seems at first glance, that both companies are about fairly valued. Wells Fargo has a higher expected growth rate, but JPMorgan pays the better dividend. There are traits to like about both so this part is pretty even. (JPMorgan – 1, Wells Fargo - 1)
Sometimes we can get an idea of which company will do well in the future, by looking at how they have performed in the past. JPMorgan has shown growth in the last few years of about 8.4% compared to Wells Fargo's growth rate of 0.65%. JPMorgan also tops Wells Fargo when it comes to beating earnings estimates. JPMorgan has beaten estimates 3 of the last 4 quarters by an average of 6.85%. Wells Fargo, on the other hand, has beaten estimates 3 of the last 4, but missed on 1. In addition, Wells Fargo's average earnings beat comes in at just 1.1%. JPMorgan has not missed estimates, and is beating them by a larger margin. Combined with the significantly higher prior growth rate this one goes to JPM. (JPMorgan – 2, Wells Fargo – 1)
If you are looking for a stock to buy, you want a company that invests right along with you. You get exactly that in JPMorgan. The company has repurchased shares in all 4 quarters of this last year. Wells Fargo has been more inconsistent. The company repurchased shares in 2 of the last 4 quarters, but issued shares in the other 2 quarters. Anytime a company beats their competition 4 to 2, it's a clear victory. (JPMorgan – 2, Wells Fargo – 1)
Another factor I look at when evaluating banks, is their balance sheet. Specifically I look for the trend in cash, loans, and deposits. Any bank that is increasing all 3 categories is one to own in this tough banking environment. Both companies have done admirably in the last year. JPMorgan has increased cash by 59%, loans by 0.65%, and deposits by about 17.5%. Wells Fargo has increased cash by 16.32%, loans by 3.41%, and deposits by 5.6%. Using an evenly weighted average, we see that JPMorgan comes in with 25.44% combined growth, versus Wells Fargo at 8.36%. Looking at just loan and deposit growth, JPMorgan still comes out on top. The company's combined gain of 9.08%, is double Wells Fargo at 4.51%. A common misconception among investors, is that banks make most of their money on loans. This has been proven to not be true. Banks actually make nearly 80% of their profits from service charges and connected income from deposit accounts. This makes JPMorgan's gain in deposits of over 17% even that much more important. (JPMorgan – 2, Wells Fargo – 1)
One of my favorite investors of all time, Peter Lynch, said when evaluating financial institutions he looked at their equity-to-assets ratio. His criteria was anything over a 6 was good, and the higher the number the better. If it's good enough for Mr. Lynch it's good enough for me. JPMorgan shows a ratio of 7.96 and Wells Fargo comes in at 10.56. Wells Fargo wins this one hands down. Both ratios are strong, but Wells Fargo is clearly stronger. (JPMorgan – 1, Wells Fargo – 2)
Looking at our scorecard we see JPMorgan Chase scores an 8 and Wells Fargo scores a 6. It's close, but JPMorgan wins in the categories that count. When it comes to the strength of a bank there might not be better tests than loan growth, deposit growth, and prior growth. The fact that JPM was able to increase earnings by over 8%, during one of the toughest financial markets most of us have seen, is too impressive to ignore. When you combine that, with the fact that they grew loans and deposits faster than Wells Fargo you have a clear winner. I like both companies and have owned both in the past, but at this point JPM seems to be the better bargain.
The Motley Fool owns shares of JPMorgan Chase & Co. and Wells Fargo & Company and has the following options: short APR 2012 $21.00 puts on Wells Fargo & Company, short APR 2012 $21.00 puts on Wells Fargo & Company, short APR 2012 $29.00 calls on Wells Fargo & Company and short APR 2012 $29.00 calls on Wells Fargo & Company. MHenage has no positions in the stocks mentioned above. 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.