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. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  2. Stock Analysis

    The Biggest Risks of Investing in Pfizer Stock

    Learn the biggest potential risks that may affect the price of Pfizer's stock, complete with a fundamental analysis and review of other external factors.
  3. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  4. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  5. Markets

    PEG Ratio Nails Down Value Stocks

    Learn how this simple calculation can help you determine a stock's earnings potential.
  6. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  7. Investing

    What’s the Difference Between Duration & Maturity?

    We look at the meaning of two terms that often get confused, duration and maturity, to set the record straight.
  8. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  9. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  10. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  1. What does low working capital say about a company's financial prospects?

    When a company has low working capital, it can mean one of two things. In most cases, low working capital means the business ... Read Full Answer >>
  2. Do nonprofit organizations have working capital?

    Nonprofit organizations continuously face debate over how much money they bring in that is kept in reserve. These financial ... Read Full Answer >>
  3. Can a company's working capital turnover ratio be negative?

    A company's working capital turnover ratio can be negative when a company's current liabilities exceed its current assets. ... Read Full Answer >>
  4. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
  5. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  6. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>

You May Also Like

Trading Center