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Why Wells Fargo Will Have the Best Q1 Earnings Among Big Banks

By John Maxfield – Mar 31, 2016 at 12:17PM

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Wells Fargo’s straightforward business model should pay off again when it reports first-quarter earnings on April 14.

While it's impossible to predict the future, it seems fair to say that Wells Fargo (WFC 0.61%) will turn in the best earnings for the first three months of the year compared to its big bank counterparts JPMorgan Chase (JPM 0.49%) and Bank of America (BAC 0.23%).

This will come as no surprise to investors who follow bank stocks. The main reason for this is simply that Wells Fargo has long been one of the most profitable big banks in America. It turned in a 1.32% return on average assets last year. JPMorgan Chase and Bank of America, meanwhile, generated ROAs of 0.99% and 0.74%, respectively.

This has fueled an impressive increase in Wells Fargo's tangible book value per share, which in turn heavily influences the price of the bank's shares. Over the past decade, Wells Fargo's tangible book value per share has increased by 433%. That growth rate is almost twice as fast as JPMorgan Chase and is more than 10 times faster than the increase in Bank of America's tangible book value per share.

WFC Tangible Book Value (Per Share) Chart

WFC Tangible Book Value (Per Share) data by YCharts.

Wells Fargo's ability to distance itself from the pack could even accelerate in the first quarter of this year. This is because the California-based bank relies less on investment banking and trading revenue than JPMorgan Chase and Bank of America do. Both of these business lines are widely expected to lag the prior year in the first three months of 2016.

Citigroup has said that its trading revenue could drop by 15% in the first quarter. JPMorgan's estimates are even direr. It said recently that sales and trading revenue will be down by 20%. Making things worse is the fact that the first quarter is generally the most lucrative for trading operations, as institutional clients shift their holdings.

This is problematic for banks with large Wall Street operations. JPMorgan Chase, for example, gets 20% of its noninterest income from trading. Bank of America looks to the activity for 15% of its total noninterest income. Wells Fargo, on the other hand, earned less than $100 million from trading last quarter, equating to less than 1% of its noninterest income.

The same story appears to be unfolding with respect to investment banking fees -- another area where JPMorgan Chase and Bank of America have much heavier presences than Wells Fargo. Dealogic estimates that investment banking fees around the world are down by 36% so far this year compared to this time in 2015. The industry is on track to record the lowest quarterly total of investment banking fees since the apex of the financial crisis at the beginning of 2009.

To get a sense for the impact this will have, JPMorgan Chase generated $1.8 billion in investment banking fees in the first quarter of last year. The same figure at Bank of America came in at $1.3 billion. By contrast, Wells Fargo does so little business in this area that its income statement doesn't even break out the total.

In sum, the stars are aligning to ensure that Wells Fargo will once again report the best quarterly earnings among the nation's three biggest banks.

John Maxfield owns shares of Bank of America and Wells Fargo. The Motley Fool owns shares of and recommends Wells Fargo. The Motley Fool has the following options: short May 2016 $52 puts on Wells Fargo. The Motley Fool recommends Bank of America. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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