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Big Banks

Wells Fargo Looks a Loser in New Era for Banking

January 15, 2017

[Photo:  Eric Thayer for Bloomberg]


Friday’s earnings by 3 big banks showed mixed results.  Profits rose significantly for JPMorgan Chase (24%) and Bank of America (43%), while Wells Fargo’s net profits declined 5.4% from a year earlier and came in below analyst expectations. The fallout from the bank’s account-sales fiasco continues to hurt, mainly through elevated costs.


The bigger picture is that Wells Fargo isn’t set up to benefit as much from the current environment. Its balance sheet is deliberately geared toward a low interest rate environment by holding more long-dated assets. As recently as May the bank said it continues to plan for a lower-for-longer rates environment.


Wells Fargo, a more retail-oriented bank than its peers, is also suffering from its relatively small trading operation. This wasn’t an issue during the years that bond and currency trading activity was weak. But volumes suddenly rebounded in the second half of last year, handing a big windfall to banks like JPMorgan.


The clearest indication that Wells Fargo’s edge is slipping is its return on equity, the ultimate gauge of value creation for shareholders. This fell to 10.9% in the fourth quarter, from 11.9% a year earlier. That compares with 11% for J.P. Morgan in the fourth quarter, the first time in years that Wells Fargo wasn’t the top returning big bank.


Despite that, Wells Fargo shares are trading at 1.57 times book value, compared with 1.36 for J.P. Morgan and 0.96 for Bank of America. Look for that premium to fall more in line with the other banks.