As interest rates have been falling and economic fears have been building, the banking sector has been one of the hardest-hit areas of the stock market. While nobody likes to watch the value of their portfolio fall, this has created some tempting bargains for patient long-term investors.
Cheap for a reason, but maybe it's too cheap
Matt Frankel, CFP (Wells Fargo): I've been taking a wait-and-see approach to Wells Fargo for a couple of years now. Specifically, I wanted to gauge the lasting effects (if any) of the fake accounts and other scandals that have been the major cause of the bank's underperformance.
Now, I think it's finally time to take a look. After several quarters of poor performance, Wells Fargo's latest results look like what we used to expect from the bank. A 13.3% return on equity (ROE) and 1.31% return on assets (ROA) put the bank well ahead of many other big U.S. banks, and a 0.28% annualized net charge-off rate shows the bank's strong asset quality.
To be fair, the bank still has some issues. Most notably, the Federal Reserve's penalty that prohibits Wells Fargo from growing is still in effect. And the bank is still without a CEO.
But it is trading extremely cheaply, and any negativity is likely already more than factored into its stock price. Thanks to a combination of the bank's own issues, falling interest rates, and general economic fears hurting the banking sector, Wells Fargo is trading for just 1.12 times its book value -- a level not seen since 2011. At the current price, Wells Fargo has a 4.6% dividend yield and is buying back its own stock at an aggressive pace. It may be time for investors to consider doing the same.
The world's biggest bank can get bigger still
Matthew Cochrane (JPMorgan Chase): When ranked by market cap, JPMorgan Chase is the largest bank in the world. As a universal bank, it performs the functions of commercial banks (also known as retail banks) and investment banks. Retail banks lend money out at a higher interest rate than they pay for interest on deposits. Investment banks serve large enterprises as they conduct complex financial transactions, such as acquisitions, initial public offerings (IPOs), or selling corporate debt.
There were several bright spots in JPMorgan's second quarter, starting with a return on equity ratio of 16% (for banks, typically anything over 10% is considered good), one of the most useful formulas for determining a bank's profitability. JPMorgan's efficiency ratio, a good measure of a financial institution's operating costs and efficiency, came in at 55% (generally anything under 60% is good). This is important because it lets investors know how much money is left over to pay off loan losses, buy back shares, and pay dividends.
The best part about investing in JPMorgan, however, is its continued willingness to use its large war chest to invest heavily in technology, ensuring it keeps up with nimbler, more-focused fintech companies. These efforts appear to be paying off. For instance, active mobile users grew to 35.4 million, a 12% increase year over year. CEO Jamie Dimon credited You Invest, its virtual brokerage and investment advisory, for driving client investment assets up 16%. The company's merchant processing segment saw sales grow 12%.
JPMorgan is a big bank, but with the investments it is pouring into payments and fintech, don't expect its growth to end anytime soon.
A clear Wall Street pick
Dan Caplinger (Goldman Sachs): The banking sector hasn't been doing all that well lately, as retail banks face margin pressure from the abrupt halt in rising interest rates. Yet although Goldman Sachs does have to deal with the impact of shrinking rate spreads on its Marcus retail banking unit, its ability to adapt to changing financial market conditions in its other business segments has often acted to differentiate Goldman from its big-bank peers.
Goldman's most recent quarterly financial report in July revealed exactly how big a competitive advantage the Wall Street giant has. Even as its rivals struggled, it was able to top expectations for its equity trading unit, and a strong environment for initial public offerings has helped bolster the company's investment banking revenue.
Even though share prices haven't done all that well over the past year, Goldman's book value has consistently climbed, and that's left the stock trading at a rare discount to book. With opportunities for the company to further diversify into the consumer sector through its Marcus unit, Goldman Sachs has plenty of growth ahead -- and even the threat of market turbulence in the short term could actually support the company by allowing its proprietary traders to show their expertise.