Will Investors Revalue the Banking Space after the Trump Turmoil?
Banks’ lower valuations of late are mainly the result of their weaker performances since the 2007 financial crisis, their shedding of risky assets, and their selling of profitable divisions in order to pass stress tests.
Commercial banks (XLF) have seen strong growths in their core banking businesses backed by rising interest rates and steady growth in the broader economy.
JPMorgan Chase’s (JPM) investment banking division posted revenue of $19.5 billion in 1Q17, helped by a 25% rise in banking and a 34% rise in investment banking.
Rising equities and trading activities have benefited commercial banks and brokers in the form of higher revenues and profits. In 1Q17, JPMorgan Chase beat analysts’ consensus EPS estimate.
Commercial banking stocks fell 3.2% on May 17, reflecting a potentially major impact if Trump’s targeted policies don’t materialize. Overall, investors have shifted toward treasuries.
Wells Fargo is trading at a price-to-book multiple of 1.48x compared to the industry average of 1.09x—a significant premium compared to its peers.
In May, 13 of the 31 analysts covering Wells Fargo rated the stock as a “buy,” 12 analysts rated it as a “hold,” and six analysts rated it as a “sell.”
Wells Fargo (WFC) enhanced its payouts in recent quarters in the form of dividends and repurchases in a bid to rebuild investors’ confidence.
Wells Fargo had a higher efficiency ratio over the past few quarters, which reflected falling operating margins. Its efficiency ratio rose to 62.7% in 1Q17.
Wells Fargo’s loan book rose consistently in 2016 and witnessed a marginal decline in 1Q17. Its total loan book stood at $958 billion as of March 31, 2017.
Commercial banks (XLF) have seen their interest income and margins rise over the past few quarters due to rate hikes.
Wells Fargo (WFC) is expected to post EPS (earnings per share) of $1.02 in 2Q17 and $1.07 in 3Q17 due to higher credit and improved net interest margins.
JPMorgan Chase’s (JPM) stock has given a compound annual growth rate (or CAGR) return of 20.2% over the past five years.
JPMorgan Chase (JPM) has enhanced its dividend and payout ratio in line with its operating performance.
In May 2017, 16 of the 29 analysts covering JPMorgan Chase (JPM) rated the bank’s stock as a “buy” or “strong buy” as compared to 15 analysts in April 2017.
J.P. Morgan (JPM) advises corporates on fundraising, strategic transactions across countries, and trading activities under its corporate and investment banking division.
JPMorgan Chase’s (JPM) Consumer and Community Banking division garners its revenues from its credit card business, consumer and business banking, and mortgage banking.
JPM’s (JPM) asset management business deploys funds across asset classes including equities, debt, and alternatives.
In 1Q17, JPM’s commercial banking business garnered $2.0 billion in revenues and $799 million in net profits, a growth of 12% and 61%, respectively, on a YoY (year-over-year) basis.
In this series, we’ll look into JPM’s expected performance, growth outlook, asset management, and valuations in 2017.