After Taking Wells Fargo's Crown, Is JPMorgan a Steal?

Stocks were down today, with the S&P 500 (^GSPC -1.20%) and the narrower, price-weighted Dow Jones Industrial Average (^DJI -0.65%) declining 0.2% and 0.3%, respectively. The VIX Index (^VIX 11.09%), Wall Street's fear gauge, climbed 0.7%, to close at 13.50. (The VIX is calculated from S&P 500 option prices, and reflects investor expectations for stock market volatility over the coming 30 days.)

The most valuable U.S. bank
Yesterday, Dow component JPMorgan Chase (JPM 0.06%) took Wells Fargo's (WFC 0.89%) title as the most valuable U.S. bank. JPMorgan held that advantage today, even as emails surfaced showing that employees of JPMorgan, Washington Mutual, and Bear Stearns -- the latter two firms were acquired in distress by JPMorgan during the financial crisis -- cut corners in order to securitize poor quality loans. JPMorgan's market capitalization is $183.3 billion against $182.5 billion for Wells Fargo.

However, a truer measure of investors' relative preference for these institutions is the valuation multiples they are willing to pay for their shares. On that front, Wells Fargo remains the clear winner, at least on the basis of price-to-book value multiples:

Source: Author's calculation, S&P Capital IQ

Does the gap in valuation imply JPMorgan's are cheap? After all, the two banks are similar in one regard: They are arguably the best-managed banks in their peer group -- Wells Fargo as a commercial bank, JPMorgan Chase as a universal bank that combines investment and commercial banking.

It would be premature to conclude the shares of JPMorgan are cheap, and here's why. On the basis of the price-to-earnings multiple, Wells Fargo shares command a much smaller premium -- just 5%:

 *Next twelve months' earnings-per-share estimate. Source: Author's calculation, S&P Capital IQ

As the banking environment and bank valuations normalize – JPMorgan shares now trade near their book value -- it's the opinion of this columnist that investors will pay more attention to the earnings multiple, which reflects earnings power, than to the book value multiple. Wells Fargo deserves a genuine premium in its price-to-earnings multiple. While the long-term earnings growth estimates for both are roughly identical (median estimates: 8%), the risk profile of Wells' expected earnings stream is lower. JPMorgan may have taken Wells Fargo's crown, but investors may be rewarded by swearing allegiance to a deposed king.