Wells Fargo & Co (NYSE:WFC) and JP Morgan Chase & Co. (NYSE:JPM) are among the top picks for Michael Mangan, Portfolio manager at Harris Associates. Both Wells Fargo and JP Morgan had to pay huge sum as fines following the financial crisis back in 2008-09. In Spite of the continuing fines paid by these companies, Mangan talked on CNBC about why he likes these stocks.
Mangan feels that fines for these banking companies are expected after the financial system break down in 2008-09. But he thinks that we are approaching the tail end of the fines for Wells Fargo & Co (NYSE:WFC) and JP Morgan Chase & Co. (NYSE:JPM). He said that earning power of these institutions would help them recover from the fines and do well in future. But both these companies are not definitely among the top 10 most profitable companies in the world in 2014.
“[…] what drives earning power for a company like Wells Fargo? Its growth in earning assets, its growth in deposits and its growth in customers and they have been growing those; 13% or so on assets, 5% customers and 10% on deposits in their last report and all of that doesn’t yet get reflected in the bottom line because of where we are on interest rates; grew 2 – 4% and we are going to see going forward the benefits of that growth in those categories that really drives the earnings power,” Mangan said.
Harris associates top 10 holding includes both Wells Fargo & Co (NYSE:WFC) and JP Morgan Chase & Co. (NYSE:JPM). He feels that JP Morgan is a completely different company when compared to Wells Fargo. He thinks that both the companies are very well managed and that is what he look at for investing in them. He thinks that both the banks have the situation with fines very well under control.
Mangan added that most of the investors and analysts have readjusted their expectations on the banking stocks like Wells Fargo & Co (NYSE:WFC) and JP Morgan Chase & Co. (NYSE:JPM) mainly due to reduced return on equities. He thinks that ROI’s for these banks will be going down. He mentioned that these stocks are selling at 10 times earnings, which he feels is very low. He added that they should be selling at around 12 – 14 times earnings, but he thinks that even with that multiples the earning power might not reach the expected normalized earning power.
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