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Bank Earnings Review: Not All Winners Are Valued Equally

- By Jeremy LaKosh

Four big banks led financials in reporting their first-quarter earnings Thursday. These banks - Citigroup (NYSE:C), Wells Fargo (WFC), PNC Financial (PNC) and JPMorgan Chase (JPM) - all reported better-than-expected results. While the earnings reports demonstrate that large financial institutions appear poised to outperform analyst expectations across the board, a deeper dive into specific financial data can help investors delineate between each bank's investment opportunity.


Each bank has a higher share price than a year ago, but Wells Fargo stands apart from the group. While the other three banks are up by almost 30% or more, Wells Fargo has only seen an increase of 6%. When comparing to earnings growth, a similar trend appears. While the three banks with big share jumps have more meager earnings growth, Wells Fargo earnings are down nearly 2%. Wells Fargo is departing from this pattern due to the phony account scandal, which has yet to be completely resolved.

Taking the valuation analysis further, all four banks have seen their trailing and forward earnings multiples expand over the past year. PNC is the most pricey as its stock trades over 15 times trailing earnings and 14 time forward earnings. Citi trades at the greatest discount at under 12 times trailing earnings and slightly over 12 times forward earnings. JPMorgan Chase and Wells Fargo are relatively similar in valuation trading between 12 and 13 times valuation. Investors can get the same valuation in owning JPMorgan without the cloud of scandal.

While JPMorgan and Citi may be poised to deliver better results for value investors, income investors should also consider each bank's dividend yield. Wells Fargo offers a near 3% dividend yield while JPMorgan offers a yield close to 2.5%. But what if JPMorgan's dividend outgrows Wells Fargo? A quick analysis of projected dividend growth (plowback ratio X return on equity) found that each bank is projected to grow its dividend by 6%. Therefore, Wells Fargo is a better opportunity for income investors.

Overall, JPMorgan and Citi are more appealing to value investors. These stocks provide attractive price to earnings ratios compared to their peers. For income investors, Wells Fargo holds a higher dividend yield which can provide income through possible share price volatility caused by its scandal.

Data calculated from the close of Thursday's market.

Disclosure: I have no positions in any of the securities mentioned in this article.

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This article first appeared on GuruFocus.