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Wells Fargo or Bank of America: Which Is a Better Bet in 2017?

PART:
1 2 3 4 5 6 7 8 9 10 11 12 13 14
Part 12
Wells Fargo or Bank of America: Which Is a Better Bet in 2017? PART 12 OF 14

Why Bank of America Offers More Value than Wells Fargo

Valuations

Banking stocks (XLF) typically trade between 1x–2x their book values. Stocks that trade lower than their book values are attractive investor targets due to their poor returns. A company’s price-to-book value (or PBV) compares its current market price to its book value.

Why Bank of America Offers More Value than Wells Fargo

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In the past ten years, Wells Fargo’s (WFC) book value has increased to twice that of JPMorgan Chase (JPM) and ten times that of Bank of America (BAC). As one of the country’s most profitable banks, Wells Fargo generated an ~1.3% return on assets in 2015. The bank shoulders less risk because it doesn’t rely as heavily on investment banking and trading activities.

Wells Fargo trades at a premium to its peers in the banking space, and interest rate hikes could have a positive effect on its earnings. In contrast, Bank of America trades at extremely inexpensive valuations.

Bank of America trades at a PBV of 0.87x, which implies an ~14% discount to its book value. In comparison, JPMorgan Chase (JPM), Wells Fargo (WFC), and Goldman Sachs (GS) are trading at PBVs of 1.2x, 1.4x, and 1.1x, respectively.

Such cheap valuations are associated with banks in crisis and are also signs of a company’s poor profitability. In 2016, BAC generated ROA (return on assets) of 0.82%, which was lower than its target of 1%. However, if interest rates rise, BAC’s profitability could improve, potentially giving the stock significant upside potential.

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