Like it's larger rival JPMorgan (NYSE:JPM), Wells Fargo (NYSE:WFC) delivered a solid, better-than-expected second quarter on Friday morning. Clearly there is still pressure on the business, as loan growth is faint and yields are low, but lower credit costs are helping underpin earnings. Wells Fargo and JPMorgan seem virtually equally undervalued, and both offer investors a quality play on the banking sector. With JPMorgan's greater exposure to trading and investment banking, as well as further regulatory changes, Wells Fargo is arguably the better play for investors looking to benefit from an eventual improvement in loan growth and yields.

SEE: July 12: Earnings To Test The Market Rally

Q2 Comes In With A Solid Top Line And Good Credit
Wells Fargo delivered a fairly straightforward good quarter, as both revenue and credit costs were stronger than expected and the company once again beat the estimate for the period.

Operating revenue rose 1%, as net interest income rose 3% (sequentially) and offset a 1% decline in fee income that was smaller than expected. Looking at the components, Wells Fargo saw a 3% increase in average earning assets, but a 45-point year-on-year decline in net interest margin (NIM was close to flat sequentially, and slightly better than expected). Within the fees, mortgage banking was basically flat, while trust and credit card fees grew more than expected. 
With expenses down slightly on a sequential basis, operating income rose 3% sequentially. It is worth noting, though, that the non-interest expense line was something of a disappointment. I would have expected expenses to decline more given that a lot of the compensation in mortgage banking is commission based, but this isn't the first time a major bank has found it hard to reach Wall Street's expense targets.

On the credit side, the non-performing asset and non-performing loan ratios continue to decline, each down a little more than 20bp sequentially. Net-charge-offs were also lower than expected (with the ratio declining about 13bp sequentially), and the loan loss provision was nearly cut in half. With both Wells Fargo and JPMorgan reporting strong credit trends in housing and cards, I think there's reason for optimism about credit performance at other banks like PNC Financial (NYSE: PNC) and U.S. Bancorp (NYSE:USB) at this point.

SEE: 5 Earnings Season Investing Tips

Core Business Still Sluggish
It's well worth noting, though, that Wells Fargo's loan growth is still sub-optimal. Wells Fargo did better than JPMorgan this quarter (and not as well as two smaller banks that have reported, Commerce Bancshares (Nasdaq:CBSH) and Bank of the Ozarks (Nasdaq:OZRK), and commercial lending was up nearly 2% on a sequential basis, but it's still very much a low-growth environment.

The mortgage business, which is a significant one for Wells Fargo, is also pretty mixed at this point. Given the company's market share, it isn't surprising that JPMorgan appears to be outgrowing them and it's well worth remembering that the bank did do better than expected. Even so, this doesn't look like an accelerating growth driver at this point.

The Bottom Line
Although they're very different businesses, JPMorgan and Wells Fargo look strangely similar from a valuation standpoint. I use a higher expected long-term ROE in my Wells Fargo model (14% now), but the resulting fair value of about $47.50 suggests similar appreciation potential as for JPMorgan (about 10%). Likewise, while I believe Wells Fargo's much higher return on tangible assets merits a much higher multiple to tangible book value (2.3x versus 1.6x), the resulting fair value of about $50.50 is, like JPMorgan's TBV-based target, about 18% higher than today's price. Incidentally, they're both also yielding 2.8% at present.

All things considered, I think Wells Fargo is still a stock worth considering today for long-term investors.

Disclosure: As of this writing, the author owns shares of JPMorgan.

Related Articles
  1. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  2. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  3. Investing Basics

    5 Things To Ask Before Hiring A Financial Advisor

    Choosing a financial advisor isn't an easy task. Here's a list of the most important things to consider when planning for your financial future.
  4. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  5. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  6. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  7. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  8. Investing News

    Could a Rate Hike Send Stocks Higher?

    A rate hike would certainly alter the investment scene, but would it be for the better or worse?
  9. Investing News

    Corporate Bonds or Stocks: Which is Better Now?

    With market volatility high, you may think it is time to run for corporate bonds instead of stocks. Before you do take a deeper look into which is better.
  10. Mutual Funds & ETFs

    Using Short ETFs to Battle a Down Market

    Instead of selling your stocks to get gains, consider a short selling strategy, specifically one that uses short ETFs that help manage the risk.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!