Wells Fargo vs. JPMorgan Chase: The Winner May Surprise You

Bank earnings season kicked off today with Wells Fargo (NYSE: WFC  ) and JPMorgan Chase (NYSE: JPM  )  the first to announce their fourth-quarter and full-year results -- and despite opposite market reactions, the winner may surprise you.

Wells Fargo's net income rose 16% year over year to $21.9 billion, and JPMorgan Chase watched its net income fall by 16% to $17.9 billion. At first glance, they couldn't have performed any differently.

While the two are seemingly very different, with one having an image of a consumer-focused bank headquartered in California and the other as the titan of investment banking and the image of Wall Street, the two are strikingly similar.

Surprising similarities
JPMorgan Chase had a net income of $23.9 billion, and Wells Fargo had net income of $22.6 billion. Of that income, the breakdown of core businesses was very similar:

Source: Company earnings reports.

As you can see, each is predominantly a consumer bank and has an equal percentage of net income attributable to asset management and retirement services, and although JPMorgan Chase has a greater percentage of its income from its business banking relationships, it isn't dramatically different than what Wells Fargo posts (47% vs. 36%).

Chase Tower, Chicag.o Source: John Picken.

Citigroup (NYSE: C  ) , which many people would likely peg as more similar to JPMorgan Chase than Wells Fargo, actually had 17% of its income from its transaction services business line, which caters solutions for businesses for their cash management and trade functions. That business combined with its securities and banking operations encompassed 60% of its total net income in the third quarter.

The real winner
Knowing that Wells Fargo and JPMorgan Chase are more similar than they are often given credit for, a quick glance at the numbers reveals something rather curious:

Source: Company earnings reports.

One of the biggest reasons for the sizable gain in Wells Fargo's earnings was its credit costs (its provision for credit losses -- what it expects to lose on its loans) decreasing by $4.9 billion. While JPMorgan had a larger percentage decline, this only attributed $3.2 billion of the jump in earnings.

In addition, while the expenses at JPMorgan Chase were up by 9%, the company notes its adjusted expenses -- which exclude settlement costs -- actually falls by $10.5 billion to $60 billion, which is roughly flat relative to the $60.1 billion posted in 2012. 

By simply factoring out the legal costs, it turns out JPMorgan Chase boosted its pre-tax earnings from $33.5 billion to $36.4 billion, an 8% improvement over 2012 levels (when legal costs in that year are excluded as well):

Source: Company earnings reports.

While there's no denying the legal expenses that have ailed JPMorgan Chase over the last two years are indeed very real and the decreasing credit costs have helped, it's clear an improving economy has meant more profits for the bank.

However, even with the settlements, JPMorgan Chase still grew its tangible book value by 5%.

While 2013 was a difficult year for JPMorgan Chase when it came to headlines, it still seemingly came out as the winner.

The one bank that will keep winning
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Editor's note: A previous version of this article stated that by factoring out the legal costs, the pre-tax income would have been 10% higher. The Fool regrets the error.

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  • Report this Comment On January 14, 2014, at 4:32 PM, rbz wrote:

    Something doesn't seem right. When adjusting JPM's Pretax income to remove outsized legal expenses, the author doesn't seem to adjust income tax upward. Keeping tax rates the same as were posted in 2012 and 2013, would bring adjusted net income growth up from -16% to 1% year-over-year. Not nearly up to 10%.

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Patrick Morris

After a few stints in banking and corporate finance, Patrick joined the Motley Fool as a writer covering the financial sector. He's scaled back his everyday writing a bit, but he's always happy to opine on the latest headline news surrounding Berkshire Hathaway, Warren Buffett and all things personal finance.

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