A Tale of Two Banks: JPM & WFC

02/06/2017 8:00 am EST

Focus: STOCKS

Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

Two of our recommended U.S. bank stocks released their year-end results last week. One blew by analysts' estimates while the other left investors deeply disappointed, notes Gordon Pape, editor of The Internet Wealth Builder.

Banks are expected to be among the main beneficiaries of the new era of rising interest rates, increased inflation, and deregulation that is expected under the Trump administration. JPMorgan Chase (JPM), the largest U.S. bank by assets, is already starting to reap the benefits of the new climate.

The company reported a modest 2% increase in revenue, to $24.3 billion in the quarter. But net income rose almost 24% from the previous year to $6.7 billion ($1.71 per share) from $5.4 billion ($1.32 per share) in the same period of 2015.

The surprise market surge that followed Donald Trump's upset election victory was a prime contributor to the fourth-quarter gains.

Rising interest rates are expected to benefit all the banks because they enhance the spread between how much interest a bank pays on deposits and how much it can collect on its loans. The wider the spread, the more money the bank earns.

JPMorgan is on record as saying a 1% increase in rates will add $3 billion in loan profits over a year. Fourth-quarter results began to reflect that, with net interest income up 5% to $12.1 billion, primarily driven by loan growth and the impact of higher rates.

If the Federal Reserve Board raises its key rate three more times this year, as expected, JPM's net interest income will continue to benefit. We rate the stock a Buy.

For the negative side of the banking story, let's look at Wells Fargo (WFC). This is the company that has been embroiled in a scandal involving the fraudulent opening of some two million accounts as employees tried every trick in the book to make unrealistic sales quotas.

The company's fourth-quarter report, the first full quarter since the scandal became public, clearly showed that the public was paying attention.

The Community Banking segment, which was the division of the company responsible for the fake accounts, saw a year-over-year drop in revenue of 5.4%. Overall, the bank saw a drop in earnings per share for the year from $4.12 in 2015 to $3.99 in 2016.

Like JPMorgan Chase, Wells Fargo is benefitting from rising interest rates. Net interest income in the fourth quarter increased $450 million from the previous quarter to $12.4 billion.

Shares in JPM are up 59% from the 52-week low of $52.50, while those of WFC have gained only 26%. It's going to take some time before Wells Fargo is able to regain public confidence, which is essential for a retail-oriented bank.

Warren Buffett hasn't dumped his shares of Wells Fargo so we won't either. However, if you are making new investments in the U.S. banking sector right now, I'd choose JPMorgan Chase.

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