The March 14th release of a Senate subcommittee’s devastating takedown of JP Morgan’s (JPM) flawed risk management has put not just another chink in CEO Jamie Dimon’s rep, but the stock as well, as seen in a stock chart.
Holding one’s breath to see if the Volcker Rule is ever finalized (and what timeline it will impose for banks to get in line) could lead to asphyxia. That makes a bank like JPMorgan that feeds off its own leveraged prop trading a dicey proposition. But it’s a mistake to paint all big banks as JPMorgan doppelgangers.
Wells Fargo (WFC) and U.S. Bancorp (USB) aren’t relying on in-house hedge-fund-like portfolios. Instead, their business plans focus on more classic banking functions such as taking in deposits, generating fees off of those accounts and making retail and commercial loans. They are your grandfather’s bank.
They also happen to be among the top 10 holdings of Berkshire Hathaway’s (BRK-B) investment portfolio. Both Wells Fargo and U.S. Bancorp are also among the top 10 holdings in a quietly superb mutual fund, BBH Core Select; its 9% annualized gain over the past five years is nearly 4 percentage points better than the S&P 500’s return. (The BBH Core Select team runs a concentrated portfolio of about 30 high-quality, well-managed companies. Its biggest holding: none other than Berkshire Hathaway.)
Both Wells Fargo and U.S. Bancorp have consistently out-paced JPMorgan on two key shareholder metrics:
In a low-rate environment, banks that rely on deposit accounts and lending are going to see their net interest margin squeezed. Both Wells Fargo and U.S. Bancorp have had indeed seen their net interest margin slide in recent quarters to about 3.6%. That’s still above the 3.37% average for U.S. banks.
Residential mortgage is a significant piece of each bank’s business plan. Given the robust return of buyers (not just refinancers) into the getting-healthier housing market, that could provide a boost to both banks’ bottom lines.
And In the just-completed latest round of Fed stress tests, both banks had their capital plans greenlit; both JPMorgan and Goldman Sachs (GS) were told to refile. Wells Fargo announced that it is boosting its quarterly dividend payout 20%. U.S. Bancorp announced it plans an 18% dividend boost in the second quarter, along with authorizing $2.25 billion in share repurchases over the next year. Their dividend yields of 2.6% and 2.3%, respectively, are already well above the 1.8% average payout of the S&P 500’s financial service sector.
From a valuation standpoint, both banks have been inching up a bit over the past year, but their PE ratios are still below average compared to the financial service segment of the S&P 500. And these two “old-fashioned” banks without the risk profile of a JPMorgan are trading well below the market’s 14 forward price/earnings multiple.
Sure, banks carry plenty of baggage these days. But with Wells Fargo and U.S. Bancorp you get two high-quality conservatively run banks that aren’t dependent on high risk investments, and also aren’t trading at high valuations.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at email@example.com.
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