This has provided the financial strength to make opportunistic acquisitions during rocky times; the purchase of Wachovia back in 2008 provided a big boost to Wells Fargo & Co (NYSE:WFC)’Wells Fargo & Co (NYSE:WFC)’s national footprint, and it positioned the bank as an undisputed leader in key areas like mortgage lending.
Wells Fargo originated $109 billion in mortgage loans in the first quarter of 2013, more than double the $53 billion originated by JP Morgan and making Bank of America Corp (NYSE:BAC) and Citigroup Inc (NYSE:C) look like small regional banks in comparison, with $24 billion and $18 billion respectively.
Fluctuating interest rates may generate some volatility in the mortgage business in the middle term, but over the next several years it should provide some very interesting opportunities for the company. The housing sector is showing clear recovery signs, and it still has plenty of upside room until reaching historical averages in terms of activity. No major bank is better positioned than Wells Fargo & Co (NYSE:WFC) to profit from this long term recovery.
A fair price
Wells Fargo has price to book value of 1.4, substantially higher than the valuation levels carried by other banks. JP Morgan, for example, is trading at a price to book value around 1, which seems like a big discount considering that this another profitable company standing to benefit not only from the recovery in real estate but also from its leadership position in investing banking.
JP Morgan has been affected by the London Whale Scandal and the recent controversy surrounding Jamie Dimon and his dual role as both CEO and Chairman of the Board, so these factors have been weighting on the company´s valuation. But if investors regain their trust in Dimon and his ability to continue delivering results while avoiding negative surprises, then JP Morgan could deliver juicy returns from current levels.
Citigroup and Bank of America are very different to Wells Fargo & Co (NYSE:WFC) in terms of their risk and return tradeoff. These banks are dramatically cheaper at price to book value ratios of 0.8 and 0.65 respectively, so they have some serious upside potential as they leave the recovery phase behind and start focusing on increasing growth and profitability.
You can´t compare Citigroup Inc (NYSE:C) and Bank of America Corp (NYSE:BAC) to Wells Fargo in terms of asset quality and management track record, but that doesn´t mean that these two companies can´t outperform. On the contrary, there is so much negativity incorporated into valuations that they may easily do better than Wells Fargo over the next years, especially the economic scenario helps this beaten down giants in their effort to recover some of their lost glory.
Wells Fargo & Co (NYSE:WFC) is quite more expensive than other banks, but this premium valuation is well deserved as the quality leader among big US banks. Besides, none of this means that the bank is overvalued, considering historical valuation levels and long term growth prospects, Wells Fargo still offers plenty of upside potential.