- With consistently low-interest rates, investors should be cautious about gaining exposure to the financial sector.
- If you are looking to add a global bank to your portfolio, JPMorgan Chase & Co stock is a good choice.
- I compare JPMorgan Chase & Co's valuation with other big banks like Wells Fargo and Bank of America.
With stubbornly low-interest rates it is important that investors looking for exposure to the financial sector rely on companies with sound fundamentals and fair valuation. JPMorgan Chase & Co (NYSE:JPM) is one of the largest global banks which offers a nice balance of return performance and fair value in comparison to its peers.
First, let’s take a look at JPMorgan stock alongside a high performer like Wells Fargo (NYSE:WFC). JPMorgan sits at the lower PE of 9.9 compared to Wells Fargo’s 11.8. Through most metrics you are going to notice that Wells Fargo is trading at what seems like a premium price tag compared to JPMorgan, but that couldn’t be more wrong. There is a reason Warren Buffett recently upped Berkshire Hathaway's (NYSE:BRK.A) stake in Wells Fargo – there is value in their operations.
Below you can see that Wells Fargo is trading at a significantly higher price to tangible book value of 1.9 compared to JPMorgan’s 1.3. This is a typical metric used to value banks, and one would think the lower the ratio the better the value. However, Wells Fargo shows a significantly stronger return on assets, which is currently at 1.32% for the trailing twelve months compared to JPMorgan’s 0.99%. With consistently stronger ROA, Wells Fargo is going to naturally trade at a higher price to tangible book value.
But it’s not only ROA where Wells Fargo is beating JPMorgan. For the TTM, Wells Fargo has a return on equity of 12.8% compared to JPMorgan’s 10.3%. Not surprisingly, both banks are outperforming the industry average on ROA and ROE, but Wells Fargo has a significant edge in comparison to JPMorgan.
Now let’s make the same comparison approach, but instead of looking at a high performer like Wells Fargo we’ll take a look at Bank of America (NYSE:BAC). More similar to JPMorgan, Bank of America trades at a more modest PE of 10.6. Looking at the chart below, you will see Bank of America trades and operates on the opposite side of JPMorgan that Wells Fargo did. Bank of America is trading at a price to tangible book value ratio of 0.88. Although that ratio may scream value, it is offset by the bank’s lower ROA of 0.74%.
Once again, opposite of Wells Fargo, Bank of America has a poor return on equity of 6.32% for the trailing twelve months, which is actually below the industry average. But given their appearance of trading at a discount, this isn’t surprising. Their price to tangible book value of 0.88 is quite efficient when comparing them to their competitors’ valuations.
I haven’t provided you with anything groundbreaking here. I simply took some of the most important metrics for financial services valuation and tried to show how efficiently the major global banks are actually being traded. Wells Fargo trades at what looks like a premium because they offer up high returns on assets and equity. Bank of America trades at what looks like a discount but provides far lower returns on assets and equity. And of course, JPMorgan falls somewhere in the middle. With that said, I think JPMorgan Chase & Co stock is a good choice for an investor who is looking for some exposure to global banks. They portray a fair balance between valuation and returns and offer a reliable dividend yield with a reasonable payout ratio of 32.21%.