Fourth-quarter earnings at the four major commercial banks show a divide between those that achieved profitability (JPMorgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC)) and those that didn't (Bank of America (NYSE: BAC) and Citigroup (NYSE: C)). Nevertheless, even in the "lead pack," loan loss rates continued to rise across virtually every loan category. Should Wells Fargo shareholders be concerned?
Shares look cheap
The risk of further credit losses at quality banking institutions is offset by share valuations, which look pretty cheap ... on the basis of "normalized" earnings that are probably a couple of years down the road (see table). Last week, for example, value guru Bill Miller of Legg Mason (NYSE: LM) spoke approvingly of the shares of JPMorgan Chase and Bank of America. As far as Wells Fargo is concerned, I continue to believe the acquisition of Wachovia will add enormous value to the franchise over the long term.
| Company |
Price/Earnings Multiple (FY2012 Earnings) |
|---|---|
|
Wells Fargo (NYSE: WFC) |
7.2 |
|
Citigroup (NYSE: C) |
6.5 |
|
Bank of America (NYSE: BAC) |
6.1 |
|
JPMorgan Chase (NYSE: JPM) |
7.6 |
Source: Capital IQ, a division of Standard & Poor's.
Investors who can mimic Wells Fargo's largest shareholder, Berkshire Hathaway (NYSE: BRK-A), in adopting a long-term orientation, should find that shares in JPMorgan Chase, Wells, and B of A will provide acceptable returns from here; however, I think they may experience significant volatility this year as this post-recession, post-crisis economy comes into focus (there are bound to be a few surprises!).
A wild ride still ahead?
Here's one statistic I saw this morning that suggests the banking industry still faces some headwinds: According to data from research firm Foresight Analytics, more than a third (36%) of the $270 billion in commercial real estate loans maturing this year are underwater. The percentages for loans maturing in 2011 and 2012 are even higher: 49% and 63%, respectively. For bank shareholders, the wild ride might not be over yet.
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