These 3 bank stocks won the earnings season. They are all worth buying.

Text size

Wells Fargo is a good game for investors who can handle a little uncertainty.

The time of dreams

This banking earnings season has had its winners and losers, but the winners couldn’t be more different.

Of the six major banks that released their fourth quarter results this month, only three saw their shares rise on their respective earnings day:


Morgan Stanley

(symbol: MS),


Bank of America

(BAC), and


Wells Fargo

(WFC). Their upside moves were even more remarkable when stacked against recent volatility in the


S&P500.

Banks differ in their areas of focus, but they share one key element: better expense management than their less fortunate counterparts.

Rising spending across the sector was well telegraphed ahead of earnings. For months, headlines dominated the headlines about rising inflation, and banks had to rush to raise pay to find and retain talent.


JPMorgan Chase

(JPM) has had to raise starting salaries twice in the past seven months, collectively offering first-year analysts a $25,000 raise. But the reaction to JPMorgan’s earnings,


Goldman Sachs Group

(GS), and


Citigroup

(C) implied that few on Wall Street expected higher compensation costs to affect earnings.

But that’s where Bank of America, Wells Fargo and Morgan Stanley diverged, though they also had to raise pay. BofA said the rise in revenue outpaced the rise in costs, while Wells Fargo’s cutback plan following its bogus account scandal helped it post a decrease in expenses.

Morgan Stanley’s rising costs are partly attributable to its recent acquisitions of E*Trade and Eaton Vance. It has also been hit by rising compensation costs, but the bank noted that its compensation is directly tied to the revenue its bankers bring in.

Going forward, an investor cannot go wrong choosing any of these three stocks, although for very different reasons.

Morgan Stanley has appeared indestructible since emerging from the 2007-09 financial crisis. He smartly pivoted to wealth management, which provides a more stable source of income. And it has been able to profit greatly from the surge in business activity and closing of deals over the past two years. In 2021, the bank achieved a return on tangible equity of 20%, above its target of 14% to 16%. He expects to maintain, or even increase, this level.

Still, the bank does not look expensive, compared to its peers. It trades at 12.9 times forward earnings, below the industry average of 15 times, according to FactSet data.

Wells Fargo is a good game for investors who can handle a little uncertainty. The bank has had a tough time over the past five years, but its fourth quarter earnings and improved efficiency ratio (63% vs. 80% a year earlier) show it is getting its house in order . The bank “appears to be hitting its stride on fundamentals, including accelerating loan growth, net interest margin up on higher rates, encouraging progress on targeted spending savings and a solid return on capital,” writes Evercore ISI analyst John Pancari.

But Bank of America looks like the best game ever. It is well managed and, among the big banks, is the best placed to deal with rising interest rates. In the fourth quarter, the bank saw its net interest income increase by $316 million as it was able to invest its excess cash. It also recorded an increase in loans, which will increase net interest income. More importantly, BofA expects that a 100 basis point increase in interest rates, which becomes the consensus estimate of what Wall Street expects from the Fed in 2022, will increase net interest income. of $6.5 billion over 12 months.

Not bad for following the Fed.

Write to Carleton English at [email protected]