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With all the major investment banks and money centers now reporting fiscal fourth-quarter earnings, we compiled the results to compare how our Club holdings, Wells Fargo (WFC) and Morgan Stanley (MS), fared against the competitors. Investment Banking Morgan Stanley has certainly been the place to be among investment banks, not Goldman Sachs (GS). Both reported last week on January 17. The key driver of the stark contrast comes largely from non-interest income. The former was able to really lean on and reap management efforts to dig deeper into asset and wealth management, while the latter struggled with building its consumer-facing offering. Goldman Sachs missed expectations on both the top and bottom results. Dow shares sank more than 6% on the day it was reported, compared with Morgan Stanley, which jumped nearly 6% on EPS and revenue. While the return on average tangible common equity (ROTCE) was in error, Morgan Stanley’s ROTCE was 13.1%, excluding one-time integration-related costs. It was much more in line with expectations than what we saw from Goldman Sachs. We think this shows why Morgan Stanley stock warrants a 13x premium to future earnings estimates to Goldman Sachs’ 9.8x multiple. The intense focus on diversified fee-based income also serves as justification for that premium compared to Morgan Stanley’s historical stock value. His five-year average is 10.7x. Conclusion As we noted in our January 17 earnings analysis, Morgan Stanley is running full steam ahead and in a position to continue to deliver strong shareholder returns due to its more resilient fee-based income streams and strong equity position. capital. Goldman Sachs, on the other hand, deserves to be on the bench. Goldman has only earned a fraction of an annual percentage rate to date. Morgan Stanley shares are up 13% in 2023. MS GS YTD mountain Morgan Stanley (MS) YTD stock performance vs. Goldman Sachs (GS) Money-center Banks For the fourth quarter, JPMorgan Chase (JPM) had the cleaner results. Second place was a raffle between Wells Fargo and Bank of America (BAC). The net interest margin (NIM) of the former was pretty impressive, while the latter really put on a great show in ROTCE. We also like to see strong non-interest income, which we think went to BofA. In terms of which stock we like best based on these numbers, we would have to stick with Wells Fargo over Bank of America because ultimately we think it provides a better risk/reward profile. While Wells Fargo’s efficiency ratio is pretty horrendous and the bank’s ROTCE is nothing compared to BofA, we loved that NIM, a line item that drove an increase in net interest income (NII) over the period of the year. former. It’s worth noting that both the efficiency ratio and the ROTCE at Wells Fargo offer a lot of room for improvement as management addresses legacy issues, meets targets set by regulators, and works to remove its asset cap. Therein lies the opportunity though, it’s not something we say lightly as we can’t stand someone seeing bad results and taking an attitude that you can’t get any worse. In the case of Wells Fargo, we’re seeing real business improvements and notable catalysts that we don’t see elsewhere. JPMorgan was clearly the best in the fourth quarter and that’s why it trades at a premium to the group in both tangible book value (TBV) and 2023 earnings estimates. Bank of America comes in second, while Wells Fargo it is cheaper than both. While the Citi group is trading below TBV, which you may be inclined to view as a great opportunity, this name has consistently traded at a discount in recent years because it does not generate strong book returns, as indicated by the ROTCE plus low of the group We see that as a red flag. While Wells Fargo’s ROTCE is nothing to write home about, it has been held down by its asset cap and inflated expense structure, which management is working aggressively to reduce. On the fourth quarter conference call, management reiterated its confidence in achieving a 15% ROTCE as they work to remove the asset cap and address expenses. As noted in our earnings analysis last week on January 13, if we were to adjust for a $3.3 billion operating loss related to litigation, regulatory and customer remediation matters, $1 billion of equity impairment, With $353 million in severance expenses and $510 million in discrete tax benefits, the ROTCE would have been closer to 16%. That is slightly above the long-term target, as the NII was higher than management’s long-term expectations due to interest rates, financing balances, as well as mix and pricing. As Wells Fargo’s ROTCE increases, we would expect its stock multiple to expand to a level more in line with Bank of America’s. Wells Fargo’s price-earnings ratio stands at 9.1x forward-looking earnings estimates, while BofA is trading at 9.6x. WFC BAC YTD mountain Wells Fargo (WFC) YTD performance vs. Bank of America (BAC) Bottom Line So, again, taking valuation into account, along with the fact that Wells Fargo has clear areas as catalysts as milestones are reached and the asset cap is expected to be removed, we think WFC is the place to be when it comes to its four big money center rivals. (Jim Cramer’s Charitable Trust is long WFC and MS. See here for a full list of shares.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable foundation’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH OUR WAIVER. NO LIABILITY OR FIDUCIARY DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULT OR BENEFIT IS GUARANTEED.
People walk past a Wells Fargo bank on 14th Street on December 20, 2022 in New York City.
Michael M. Santiago | fake images
With all the major investment banks and money centers now reporting fiscal fourth quarter earnings, we compiled the results to compare how our Club holdings, fargo wells (WFC) and Morgan Stanley (MS), deal with competitors.
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