Money center financial titans Wells Fargo (NYSE:WFC) and JPMorgan Chase (NYSE:JPM) were among the first banks to report second quarter earnings results. Wells continued to be a standout, due in good part to minimal investment banking and international market exposures. Its current valuation also suggests there is minimal downside to owning the stock, as well as some additional, albeit modest, upside potential in the coming few years.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Quarterly Details
Wells reported modest revenue growth of 4.4% to $21.29 billion on modest average loan growth of 2.2% to $768.2 billion. Its net interest margin also fell slightly, dropping 10 basis points to 3.91%. However, this is among the highest in the peer group of large domestic banks. Cost controls fell rather significantly, as signified by a three-point drop in the efficiency ratio to 58.2. This allowed net income to jump approximately 17% to $4.62 billion, or 82 cents per diluted share.

Return on equity rose nearly a percent to 12.86%, which is also among the highest in the industry. Only U.S. Bancorp (NYSE:USB) has been logging a higher ROE and second quarter details will be known when it reports its own results in the coming week. Book value per common share ended the quarter at $26.06.

SEE: Understanding The Income Statement

The Bottom Line
Prior to the financial crisis, Wells consistently reported an ROE above 18%. Though it is unlikely to return to these pre-housing boom figures, an eventual target of 15% is reasonable. Based off the current book value figure, this suggests earnings close to $4, which it could achieve within the next couple of years.

For this year, analysts project earnings of $3.31 and a rise of nearly 11% to $3.66 by the end of 2013. Prior to the crisis, it paid out more than 40% of its earnings in the form of quarterly dividends. Returning to this level suggests an annual payout closer to $1.50 per share, or a dividend yield above 4%.

SEE: 5 Must-Have Metrics For Value Investors

All of this suggests that the bank's valuation remains reasonable, and there could be further upside as earnings and dividend payments continue to rise. It is also nice that the bank doesn't focus on investment banking activities, which have caused JPMorgan some struggles recently. Avoiding European exposure is another big positive these days. European-based banks including Santander (NYSE:SAN) and Barclays (NYSE:BCS) are seeing difficulties, given their exposure to Europe, as well as LIBOR rate-fixing allegations in the case of Barclays.

Related Articles
  1. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  2. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  3. Investing

    Don't Freak Out Over Black Swans; Be Prepared

    Could 2016 be a big year for black swans? Who knows? Here's what black swans are, how they can devastate the unprepared, and how the prepared can emerge unscathed.
  4. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  5. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  6. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  7. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  8. Stock Analysis

    Analyzing Sirius XM's Return on Equity (ROE) (SIRI)

    Learn more about the Sirius XM's overall 2015 performance, return on equity performance and future predictions for the company's ROE in 2016 and beyond.
  9. Budgeting

    5 Alternatives to Traditional Health Insurance

    Discover five of the most popular alternatives to traditional health insurance plans, alternatives that are increasingly popular as health insurance costs rise.
  10. Stock Analysis

    Will Virtusa Corporation's Stock Keep Chugging in 2016? (VRTU)

    Read a thorough review and analysis of Virtusa Corporation's stock looking to project how well the stock is likely to perform for investors in 2016.
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  3. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  4. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  5. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  6. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center