Wells Fargo is a good play for investors who can stomach a little uncertainty.
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This bank earnings season has had its winners and losers, but the winners couldn’t be more different.
Of the six big banks that posted fourth-quarter results this month, only three saw their stocks rise on their respective earnings day: Morgan Stanley (ticker: MS), Bank of America (BAC), and Wells Fargo (WFC). Their upward moves were even more remarkable when stacked up against the recent volatility of the S&P 500.
The banks differ in areas of focus, but they share one key thing: better expense management than their less fortunate peers.
Rising expenses across the sector were well telegraphed ahead of earnings. For months, headlines have been blaring about climbing inflation, and banks have had to rush to raise compensation to find and retain talent. JPMorgan Chase (JPM) had to boost starting salaries twice over the past seven months, collectively giving first-year analysts a $25,000 raise. But the reaction to earnings from JPMorgan, Goldman Sachs Group (GS), and Citigroup (C) implied that few on Wall Street anticipated that higher compensation costs would hit bottom lines.
But here’s where Bank of America, Wells Fargo, and Morgan Stanley differed—even as they also had to raise compensation. BofA said rising revenue outpaced rising costs, while Wells Fargo’s slim-down plan following its fake-accounts scandal allowed it to actually post a decrease in expenses.
Morgan Stanley’s higher costs were partially attributable to its recent acquisitions of E*Trade and Eaton Vance. It was also hit by rising compensation costs, but the bank noted that its compensation is tied directly to revenue its bankers bring in.
Looking ahead, an investor can’t go wrong choosing any of these three stocks, albeit for very different reasons.
Morgan Stanley has appeared indestructible since coming out of the financial crisis of 2007-09. It smartly pivoted to wealth management, which provides a more stable source of revenue. And it was able to benefit handsomely from the surge in trading activity and deal-making over the past two years. In 2021, the bank delivered a return on tangible common equity of 20%—higher than its target of 14% to 16%. It expects to maintain—or even increase—that level.
Still, the bank doesn’t look expensive, compared with peers. It trades at 12.9 times forward earnings, below the industry average of 15 times, according to FactSet data.
Wells Fargo is a good play for investors who can stomach a little uncertainty. The bank has had a challenging run over the past five years, but its fourth-quarter earnings and its improved efficiency ratio—63% versus 80% in the year-earlier period—show that it is getting its affairs in order. The bank “appears to be hitting its groove on fundamentals, including accelerating loan growth, net interest margin upside from rising rates, encouraging progress on targeted expense saves, and solid capital return,” writes Evercore ISI analyst John Pancari.
But Bank of America looks like the best all-weather play. It’s well-managed, and of the big banks, is best poised for rising interest rates. In the fourth quarter, the bank saw net interest income increase by $316 million as it was able to invest excess liquidity. It also saw an uptick in loans, which will boost net interest income. More important, BofA expects that a 100-basis-point increase in interest rates, which is becoming the consensus estimate for what Wall Street expects the Fed to do in 2022, will boost net interest income by $6.5 billion over 12 months.
Not a bad payday for following the Fed.
Write to Carleton English at [email protected]
