In February, the nation’s five largest mortgage banks, Bank of America Corp (NYSE:BAC), Ally Financial (NASDAQOTH:ALFI), JPMorgan Chase & Co. (NYSE:JPM), Wells Fargo & Co (NYSE:WFC) and Citigroup Inc (NYSE:C), agreed to a $25 billion settlement with the federal government (and 49 state attorney generals) on account of mortgage servicing abuses. Part of the settlement included the mandating of new servicing standards and an independent compliance monitor to enforce the remedy. With this settlement now in place, investors are wondering if they should start looking at banks once again for long-term gains.
Are brighter days ahead for the nation’s largest banks? Should investors buy in? In this article, we’ll look at stock price movement, earnings, and dividend yields to see if these banks can present any good opportunities for investors.
Will JPMorgan’s profits double?
Noted analyst Dick Bove sees JPMorgan Chase & Co. (NYSE:JPM)’s profits rising over the next few years to over $40 billion. Yet, based on about $2.4 trillion in assets, that level of earnings would be tough to hit. To record the level of profits Bove predicts, JPMorgan Chase & Co. (NYSE:JPM) would have to grow its assets to more than $3.4 trillion. Now it might get there eventually, but the bulk of the company’s growth has come from acquisitions like Washington Mutual and Bank One, as opposed to internal organic growth.
As this continent’s largest bank, JPMorgan Chase & Co. (NYSE:JPM) will find itself in one court or another pretty much all the time. For instance, there are allegations that the bank continues to engage in illegal debt collection practices. Fortunately, these are more costs of doing business than genuine risks.
Despite the stock increasing by 60% over the past year, it’s still selling at a price to earnings ratio of under 10. It also has a 2.8% dividend yield and its earnings per share will be helped by continuing stock buyback plans. This should be a solid performing bank for many years.
Can Wells Fargo continue to profit?
Wells Fargo & Co (NYSE:WFC) has had its profitability tied more or less to its mortgage banking unit over the past eighteen months. In 2012, the big bank had a nearly 29% share of the nation’s mortgages, more than the next five mortgage banks combined. Last year, the bulk of its $524 billion in mortgage volume was due to homeowners taking advantage of the low interest rate environment. Essentially, the low hanging fruit has already been picked.