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Mostly Upbeat Bank Results as Earnings Begin

Eric Compton

Eric Compton: Bank earnings kicked off today, with JPMorgan, Wells Fargo, Citi, and PNC all reporting.

Wells Fargo is currently the most undervalued, as we feel pessimism over past scandals still haunts the name. Primary consumer checking customers were up 1.7% year over year, retention rates for these customers reached a five-year high, and debit and credit card purchase volumes were also both up year over year. We view these as positive signs that Wells' underlying consumer business has not been permanently impaired. If Wells can begin to get past its legal and operating woes, maintain expense discipline, and return to anywhere close to its former profitability, the bank is arguably undervalued at today's prices. We maintained our fair value estimate of $67 per share.

PNC had probably the most disappointing earnings, as expenses have generally risen in line with revenues, leading to a static efficiency ratio. Further, loan growth has slowed. In general, given the current stage of the credit cycle, we would rather a bank be more cautious and lose out on some growth as opposed to being aggressive simply to maintain growth. We can also appreciate that nonbank players are taking share, and this seems to be a pattern that plays out every cycle. Ultimately, when the cycle turns, it will be the prudent players which will be rewarded, and given PNC's history, we would expect PNC to remain prudent. Even so, after making some minor adjustments, we have decreased our fair value estimate to $134 per share, which implies shares are slightly undervalued.

JPMorgan continued business as usual, as the bank continues to fire on all cylinders, generating a return on tangible common equity of 17% during the quarter, largely matching last quarter's performance. This is already on par with management's long-term goal for the bank. We view shares as slightly undervalued and believe the bank's scale, product depth and breadth, and ability to invest some of the highest dollar amounts in technology should continue to reinforce its advantages.

Finally, Citigroup continued to progress toward its financial targets, with modest revenue growth, controlled expenses, and a return on tangible equity improving to 11.3%, already ahead of management's goal. As this was largely expected, we made no changes to our fair value for Citi.