With Bank Profits at New Highs, Is It Time to Buy or Sell?

Stocks continue to dig themselves out of the hole they dug during Monday's sell-off, with the S&P 500 (SNPINDEX: ^GSPC  ) and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) up 0.26% and 0.25%, respectively, as of 10:10 a.m. EST.

Banks: Up, up and away?
The FDIC recently released its Quarterly Banking Profile for the fourth quarter of 2012, and it contains some interesting data on the banking industry. In 2012, the industry earned near-record profits, falling behind only the bubble-boosted results of 2006. The main reason for this surge in profits: Financial groups have been decreasing their loan-loss provisions on a year-on-year basis for 13 consecutive quarters. However, the FDIC warned that such improvements are unlikely to sustain earnings growth at the same rate in the future. Where does that leave bank-share investors?

As the following table shows, none of top eight U.S. banking groups, with the possible exception of US Bancorp (NYSE: USB  ) , look particularly expensive -- whether on multiples of book value, tangible book value, or the next 12 months' earnings-per-share estimates. It's not unusual for US Bancorp shares to trade at a substantial premium to this group and to their own book value. Wells Fargo (NYSE: WFC  ) , which also generally commands a premium to commercial-banking peers, looks downright attractive at just 9.5 times earnings per share:  

 Company

Forward P/E

Price/Book Value

Bank of America

11

0.55

The Goldman Sachs Group

10.9

1.05

US Bancorp

10.9

1.82

Morgan Stanley

10.6

0.72

Wells Fargo & Company

9.5

1.26

PNC Financial Services

9.3

0.91

Citigroup

9

0.67

JPMorgan Chase

8.9

0.93

Source: Capital IQ.

On banks, investors need to be especially mindful of the flip side of the earnings growth coin: risk and opacity. Another report, from the European Banking Authority (the European Union's "supervisor of national supervisors"), found that half the variation in banks' risk-weighted assets could not be explained by objective factors such as different asset portfolios or national regulatory differences. That's important, because risk-weighted assets are the denominator in calculating banks' capital ratios -- if they're understated, a bank will appear better-capitalized (i.e., safer) than it really is.

Wells Fargo's dedication to solid, conservative banking helped it vastly outperform its peers during the financial meltdown. Today, Wells is the same great bank as ever, but with its stock trading at a premium to the rest of the industry, is there still room to buy, or is it time to cash in your gains? To help figure out whether Wells Fargo is a buy today, I invite you to download our premium research report from one of The Motley Fool's top banking analysts. Click here now for instant access to this in-depth take on Wells Fargo.


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