Starting tomorrow, quarterly results from major banks will kick-off the first quarter earnings season. The resurgence of dormant volatility due to trade war tensions, technology industry woes and inflation will certainly drive trading revenues. A tighter rate environment will also boost net interest margins.
Banks are the biggest earnings contributors of the Finance sector. The sector’s earnings outlook has notably improved as a result of tax cuts, higher interest rates, and generally favorable economic backdrop. The sector is expected to report 19.2% higher earnings on 4.5% higher revenues, which will follow the sector’s flattish performance in the preceding period.
Major banks reporting earnings Friday include Citigroup Inc. (C – Free Report) and The PNC Financial Services Group, Inc. (PNC – Free Report) . With JPMorgan Chase & Co. (JPM – Free Report) and Wells Fargo & Company (WFC – Free Report) also scheduled to report on Apr 13, this may be a good time to consider which of these is a better stock. Both of these have a Zacks Rank #3 (Hold).
Return on Assets (ROA)
Examining earnings per share alone would not generate any significant insights when determining the level of profitability of a bank. Return on Assets is a ratio which reveals how efficiently a bank is utilizing its assets to generate profits.
Currently, JPMorgan holds total assets of $377.3 billion while Wells Fargo has total assets of $253.2 billion. Our research shows that the average one year trailing 12-month ROA for Wells Fargo stands at 1.14%, higher than 1.05% for JPMorgan.
JPMorgan has lost 1.8% over the last three months, outperforming the broader industry which has declined 7.1% over the same period. Wells Fargo has dropped 17% over the same period, underperforming both the broader industry and JPMorgan.
Compared with the S&P 500, the broader industry is undervalued. This implies that the industry has the potential to gain in the near future. The industry has an average one year trailing 12-month P/B ratio – which is the best multiple for valuing banks because of large variations in their earnings results from one quarter to the next – of 1.76, which is below the S&P 500 average of 3.74. Hence, it might be a good idea not to stay away from stocks belonging to this industry.