Saturday, April 14, 2012

U.S. Banks Improving

Despite all of the negative news on the U.S. banks over the past year, they continue to post good numbers.
This past week J.P Morgan (JPM) and Wells Fargo (WFC) both reported quarterly results. While I don't take quarterly results too seriously, it's always a good read to see what's happening in the business and it's industry. I'll focus on WFC since it's a portfolio holding. WFC reported a record quarter, with net income totalling $4.2 billion, on $21.6 billion in revenue. That's a 14% and 20% jump, respectively, from the previous quarter (annualized #'s). Wells is firmly back in growth mode. I won't bore you with all the nitty gritty of the numbers, but the key take-aways are:

        * improved revenue and income growth, thanks to Wachovia subsidiary taking market share
        * improved quality of loan portfolio, net charge-offs fell to 1.25% from 1.73% a year ago
        * improved tier 1 capital to 7.81 ( a measure of health for banks, under new Basel III rules )
        * BIG dividend raise (83%) to $0.22/share/quarter. $0.88/share/year. Now yielding >2.5%
        * continued reserve releases ( money set aside to cover bad loans-released back into earnings)

With this solid performance, combined with management's comfortable outlook, it's clear the U.S. economy is getting better - not worse. While WFC is not the cheapest bank out there, it is arguably one of the best. Wells deserves a premium, which will happen over time. WFC is good value at <$30. As I have noted before, the market has come quite far since the lows of last fall and is in need of a breather. It's a good time to have cash ready to deploy at lower prices - which may come sooner than you think.

In case you are wondering, here's a ranking of "cheapness" of the banks in my portfolio. The higher the rank - the cheaper the company - the more bang for your buck.

      1st place -  Bank of America
      2nd place - Citigroup
      3rd place - Wells Fargo

You'll notice that there are no Canadian banks listed. The "big 6"  banks in Canada are fine institutions, but they are not cheap.


No comments:

Post a Comment