It might seem counter intuitive, but according to Goldman Sachs, Wells Fargo is now the bank to own.
The Banking Holding Co. (née Investment Bank) upgraded the biggest US banks, including Wells, on Monday citing:
Big banks to further outperform regionals; reiterate CL-Buy on JPMorgan Chase and Bank of America: We estimate big banks have increased normalized earnings 39% this cycle mostly via long-term accretive deals (Wells/Wachovia, PNC/National City, JPMorgan/WaMu). Regionals normalized earnings have declined 36%. Regionals are partly cyclical given a bigger hit from zero percent rates and high NPAs, however our work suggests this is a small part of the overall change (Exhibit 1). In addition to becoming more positive on select names we continue to favor JPMorgan Chase and Bank of America given changes in earnings power and stock value this cycle which suggest upside reward as returns normalize (Exhibit 2).
And on Wells Fargo specifically:
Upgrade Wells Fargo to Buy: Wells is the big winner this cycle on change in tangible assets per share, up 70% from 2Q07 to 2Q09. The reason is simple: Wells bought Wachovia at a depressed price. Up until now, leverage has held us back as Wells has among the lowest capital ratios in the industry and still needs to repay TARP. That said, we estimate that tangible common equity could increase 70bp to 4.3% this quarter via a) earnings and realization of deferred tax asset (+30bp), and b) improvement in securities prices (+40bp). Capital will still be lower than peers but will be in better shape, and the dilution concern overhang should moderate.
Tangible assets per share, for those wondering, is a pretty basic way of gauging whether a stock is under- or over-valued. On the whole, according to GS, tangible assets per share have increased 29 per cent for large banks, versus a 25 per cent decline for regional banks.
In sort of formulaic terms that difference in TAPS translates into earnings which now look like this, GS says. Click to enlarge:
Unsurprisingly the Goldman Sachs “big banks upgrade” has sparked some conspiracy theorising among financial pundits already.
Wells Fargo, incidentally, reports third-quarter earnings on Oct. 21.
Related links:
The pandora’s box of Wells Fargo and commercial real estate – FT Alphaville
Is all well at Wells Fargo? – FT Alphaville