Big banks are back, and the financial industry is stronger than ever. Almost a decade after the financial crisis, an increasingly favorable interest rate environment and renewed optimism in the broader global economy have helped to lift prospects for the largest U.S. financial institutions, and Wells Fargo (NYSE:WFC) and JPMorgan Chase (NYSE:JPM) have done their best to capitalize on the opportunities that they've had to recover and grow.

Even though many big banks have a lot in common, each one has a unique set of strengths and weaknesses, and each faces its own challenges. In particular, Wells Fargo has gone through a scandal that has resulted in dramatic recent action from regulators, and those measures could put it at a disadvantage to JPMorgan and other big banks. To weigh whether Wells or JPMorgan is the better buy now, we'll look at a number of quantitative benchmarks and qualitative analysis to evaluate both banks.

Three people talking among themselves while sitting in leather chairs in a Chase bank lobby.

Image source: JPMorgan Chase.

Stock performance and valuation

Wells Fargo and JPMorgan Chase have seen their stocks go in different directions over the past year. JPMorgan's share price is up 26% since March 2017, while Wells has suffered a 3% price drop over the same period.

Perhaps the simplest way to compare Wells and JPMorgan in terms of valuation is by using price-to-earnings ratios. When you look at trailing earnings over the past 12 months, JPMorgan looks substantially more expensive than Wells Fargo, as the Manhattan-based bank trades at a trailing multiple of 18 compared to Wells' 13. However, the gap narrows considerably when you take into account near-term future expectations, with the San Francisco-based bank's forward multiple of 11 being only a little less expensive than JPMorgan's figure of 12 times forward earnings estimates.

Banks often use price-to-book as a way of measuring valuation, and there, too, Wells Fargo looks slightly cheaper. But at roughly 1.5 times book versus 1.7 for JPMorgan, Wells' advantage is fairly small. Overall, Wells has a slightly more attractive valuation than JPMorgan at current levels.

Dividends

When big banks went through the financial crisis, they had to reduce their dividends dramatically. Yet in the aftermath of the crisis, most institutions wanted to boost their payouts as quickly as they could. Both Wells and JPMorgan have done a good job of restoring their track records for treating shareholders well on the dividend front.

Currently, Wells Fargo's $0.39-per-share quarterly payout works out to a yield of about 2.75%. That's considerably larger than the 1.9% yield that JPMorgan Chase pays through a $0.56-per-share payment every quarter. Both stocks have grown their dividends considerably in recent years, and both pay out a sustainable 30% to 40% of their earnings. That's a level that regulators are comfortable with, and so Wells' slightly depressed share price works out to a more attractive yield than JPMorgan currently.

Growth prospects and risk

So far, it looks like Wells Fargo has the advantage over JPMorgan Chase, but there's a big catch. Wells just suffered a huge blow from the Federal Reserve, which in February put limits on the bank's ability to grow. Specifically, the Fed said that Wells won't be allowed to raise its asset levels above where they were at the end of 2017. The move follows multiple problems with Wells Fargo's internal operations, including the massive scandal involving improperly opened accounts as well as subsequent problems involving auto insurance policies and mortgage operations. Wells will also have to replace three of its current board members by April and an additional one by the end of 2018 in order to comply with the central bank's restrictions. Until Wells improves its governance and risk management processes to the Fed's satisfaction, the sanctions will remain in place, threatening the bank's participation in the industry's future growth.

JPMorgan has seen struggles of its own, but it's thus far avoided the wrath of the Federal Reserve. The company's fourth-quarter financial report included solid earnings results, and although the bank saw weakness in areas like its fixed-income, currency, and commodities trading division, solid performance in its base consumer banking and investment banking operations helped to bolster sentiment about JPMorgan. The banking giant sees plenty of opportunity both here at home and internationally, with the Far East representing fertile ground for potential expansion. As it benefits from tax reform going forward, JPMorgan Chase has every intention of taking maximum advantage of increasingly favorable conditions in the financial industry.

Wells Fargo has a higher dividend and lower valuation than JPMorgan Chase at the moment, but the restrictions from the Federal Reserve on Wells Fargo's future introduce huge uncertainty. For that reason, JPMorgan is a better buy right now, and it remains to be seen whether customers will be able to regain faith in Wells Fargo's reputation after its difficult period over the past couple of years.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.