Bank Stocks Earnings: The Winners and Losers

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It’s the end of the lightning round for U.S. bank stocks, as almost all of the majors have now reported earnings. Those big names include JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC), Citibank (C) and U.S. Bancorp (USB).

Bank Stocks Recap: The Winners and Losers

If there is one clear trend that emerged here, it is that “simple” can make all the difference.

The kinds of bank stocks which outperformed were the traditional banks, which maintained a local focus and were thus better positioned to avoid the global turmoil.

And as this lightning round draws to a close, it’s time to separate the bank stocks that are worth owning from those that are not.

Bank Stocks: The Losers

Earlier this week, we marked JPM stock as a contender for a possible long-term rally. The caveat was that cost-cutting moves needed to keep pace in the third quarter. As it turned out, investors’ hopes for a rally were summarily dispelled. JPM earnings came in short of estimates with $1.32 per share, largely driven by falling revenues and escalating litigation costs.

Simply put, JPM simply wasn’t able to refocus its business well enough. Nor was it able to cut its cost base deep enough to drive EPS higher year-over-year and boost return on equity.

But lest you believed JPMorgan was the only weak link, you need to take a look at Citigroup. Despite maintaining a rise in EPS of 38% YoY to $1.31, Citibank still looks sluggish. Citibank’s revenues were down by 8% YoY, and the bottom line was hit by its so-called “bad bank,” the division created to hold (and unload) toxic assets.

Bank Stocks: The Runner-Ups

Not all of the bank stocks were either winners or losers, there were a few, in fact, with one easily surpassing the others. Bank of America beat analyst expectations and were able to slash costs and boost ROE to 10%.

This can largely be attributed to the remarkable efforts of Brian T. Moynihan. Moynihan worked his magic by refocusing the bank and navigating through choppy waters. Yet the sheer complexity of BAC does leave a high risk of unexpected costs down the road.

On the other hand, Wells Fargo stock still looks well positioned with a high ROE of 12.62%. Moreover, its conservative nature means it was able to keep away from big litigation costs, as WFC stock focuses primarily on traditional lending and mortgages and is generally far less complex than its peers.

Over the last three years, WFC’s book value average a growth rate of 9.3% per year. According to historical data, that alone tends to increase Wells Fargo’s share price by 1.6 times the book value growth. In other words, we are looking at book value growth from $31.55 per share in Q4 2014 to $34.4 by year-end.

Hence we can conclude WFC stock is on path to hit $55 by year’s end, roughly 5% higher than we are today.

Bank Stocks: The Winner

But, undoubtedly, there is one clear winner among bank stocks. It is, of course, U.S. Bancorp.

USB stock matched analysts’ expectations and increased its revenue by 3.1% to $ 5.15 billion and EPS to 81 cents. The bank, which some may deem as rather “boring,” excelled in cost control.

It has been able to outperform since it focuses on traditional lending to U.S. consumers and businesses. That is unlike its multinational peers which delve into investment banking and other more exotic activities.

A more traditional focus also means the reduced likelihood of unexpected litigation costs. This clearly rewards USB stockholders with a high ROE of 14.1%, which bests USB stock’s peers. And growth in book value per year is on average 11% per share per.

Since U.S. Bancorp preformed well, it is likely that this pace will continue. Using the matrix from our WFC Stock, book value ended at 21.5 in Q4 2014, which leaves us with a year-end target of $45.3 per share — an upside of 11% from the current stock price.

That makes USB stock our winner of the lightening round.

As of this writing, Lior Alkalay did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/10/bank-stocks-usb-stock-wfc-bac/.

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