The numbers were well received and WFC’s biggest shareholder, Warren Buffett, continues to praise WFC’s mortgage business. However, I can see very little justification for WFC’s valuation premium with a historic PE of 11.2 compared to 8.55 at JPMorgan (JPM) and 8.4 at Citi (C).
Comparisons to the first quarter are not good. Revenue was stagnant at $21.3 billion (first quarter: $21.6 billion), net interest income was stagnant at $11.0 billion (first quarter: $10.9 billion) and non-interest income fell to $10.3 billion (first quarter: $10.7 billion).
Similarly, comparisons to 2011 give little reason for cheer in the mortgage business. First lien retail mortgages only increased by 2.2% and overall loan business also only increased 2.2%. There is little sign here of the recovery.
So where did the improvement come from? Answer, it largely came from a $389 million reduction in interest expense as the company redeemed higher cost trust preferred securities. In short, a once off-improvement that will not lead to future improvement.
In fairness, WFC is a great bank that came through the financial crisis relatively unscathed and is well placed to benefit as the U.S. housing market eventually improves. It deserves a premium to riskier peers. But after five years of trawling through Citi’s books the scope for surprises is much reduced and, as Citi’s core businesses begin to recover, it is apparent that Citi’s diversified business model has much potential upside. Similarly, as investors increasingly accept the London Whale incident was a once-off and relatively minor incident, JPM can expect significant upside if valuation multiple increases to more normal levels.
Most investors are followers of Warren Buffett's every word. After making further purchases of WFC last year, Mr. Buffett told Charlie Rose “I like buying on sale.” The stocks currently priced at a discount are JPM and C.
Risk Disclaimer: This article does not constitute a recommendation to buy or sell. Investing in stocks or other securities and derivatives is a high risk activity and not suitable for everyone. It is strongly recommended that individuals should consult with a SEC registered investment adviser prior to making any investment decisions.
Disclosure: The author is long JPM. The author holds no positions in WFC or C and has no intention to initiate any in the next 72 hours.