Sifting Through The Mess: Wells, JPMorgan and Citi
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Most investors are glad to be rid of last week, and good riddance. After Friday’s drop of another 1%+, the markets officially finished with the worst 5-day stretch so far this year – ugh. It got so bad even what appeared to be good news was brushed aside by anxious investors more concerned with global economic data than earnings. Not that there’s anything wrong with that mind you – that’s the world we live in, like it or not. But before you go looking for bargains - and there are a few out there for those willing to buy and hold for a bit - make sure to dig deep. Wells Fargo (NYSE: WFC) is a perfect example.
Wells Fargo Numbers
The leading mortgage lender in the country – if not the known universe – announced some spectacular financials on Friday, only to be dissed by jittery investors to the tune of a nearly 3.5% drop in share price. For value investors – of which I am generally one – this may seem like an opportune time to jump in on the sell off. Particularly since much of the positive news was in core banking lines as opposed to a good quarter of investment returns, lower reserve requirements and other non-banking (at least traditional banking) activities. But look before you leap. At least a couple hundred million did come from the lowering of provisions for loan losses, which was only slightly offset by a $30 million increase in reserves for loan repurchases.
Profit for the bank jumped 13% for Q1, fueled by $129 billion in new mortgage loan originations. Also encouraging is management's confidence those types of gains will continue as the housing market is nearing what they refer to as a “tipping point.” The increase in loans is up from a “mere” $84 billion in Q1 of 2011, and the result was an impressive 42% pop in noninterest income – that deserves a big Yowsah, right? But just as with another big boy on the block – JPMorgan Chase (NYSE: JPM) - 15% of the volume increase was attributed to the HARP homeowner assistance program. The numbers remain impressive, but the government’s support of the housing market can’t continue forever, so should at least be factored into the mix.
Does that mean investors should ignore what was clearly an outstanding quarter and start to the new year? Nah, that’s impressive stuff no matter how you slice it, just don’t ignore what helped – at least in part - fuel the increase.
For JPMorgan Chase the news was even more convoluted than Wells. Though revenue and loan demand were up for the quarter, the $5.4 billion in profit was actually a 3% drop compared to Q1 of 2011. So what gives? Bottom line, fancy corporate lawyers are awfully expensive – so much so the legal snafus the bank found themselves in continues to impact earnings. Another key component of the announcement shareholders and prospective investors should be aware of is a full $1.8 billion of “profit” was the result of lower reserve requirements. Now, on the one hand that’s good in that it highlights a stronger loan portfolio – and less chance of default means a more reliable source of interest income.
Of course the flip side to that coin is that’s nearly $2 billion that drops right to the bottom line that wasn’t based on organic growth. Needless to say that tempers things a bit. Another factor to consider is much of the revenue gain – and it was up an impressive 24% increase over Q4 – came from capital markets. Nothing wrong with that, but those types of gains are not necessarily reliable and for that reason shouldn’t be considered core banking lines.
For Citigroup (NYSE: C) Monday is going to be a whopper. The financial services giant reports Q1 earnings before the markets open, and after underperforming most of their industry brethren so far this year management’s fingers are crossed hoping for the best. Citi has shown signs of increasing their lending activities in the recent past, as well as an improved loan portfolio - both good signs. But at a mere 9.31 times earnings and a price to book ratio of 0.55 investors continue to take a “show me the money” stance.
Most analysts are expecting little to no growth from Citi, so even the slightest good news would be welcome. But if you’ve invested in hopes of Citi outperforming expectations you’ve got gumption, that’s for sure. Long term - as with the industry as a whole – there are values to be had and Citi is one of them. But for the immediate future? Best to let the dust settle before diving in.
As mentioned in past articles Wells continues to be the leader of the pack and easily the best option for investors intrigued by the financial services sector. They’re growing through improvements in core banking lines and expense reduction initiatives. The management team continues to provide shareholders with confidence-producing results, and one of the highest dividends in the industry will make the still bumpy ride easier to tolerate.
The investment opinions included are just that, opinions. Investing involves risk, as you well know, so consider your decisions wisely. Tim holds no position in the securities mentioned in this article. Motley Fool newsletter services recommend Wells Fargo & Company. The Motley Fool owns shares of Citigroup Inc , 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 $29.00 calls on Wells Fargo & Company, short OCT 2012 $33.00 puts on Wells Fargo & Company and short OCT 2012 $36.00 calls on Wells Fargo & Company. 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.