AmEx, JPMorgan, Wells Fargo: The Select Few U.S. Financials With Buy Ratings

Includes: AXP, JPM, WFC
by: Dutch Trader

I ran a screen of which Financials in the U.S. have a buy recommendation. Apparently not that many:






Next Year

American Express


JPMorgan Chase


Wells Fargo


American Express (NYSE:AXP)

The company is the world leader in the inter-related markets of travel, entertainment and credit card. It presented strong results and showed growth despite strong competition and it looks like card charge-offs continue to normalize.

AXP reported better than expected second-quarter results. Total revenue net of interest expenses rose 12% from the year before due to higher card spending and increased fees. Return on equity increased 5% to 28%. Cardmember spending, especially at the high end of the market, was at an all-time high (+18%) and total provisions for losses declined by 45% yoy to $357 million. A minor point was expenses increasing by 21% yoy to $5.5 billion due to investments in business-building initiatives like online commerce.

Management said during its investor day that it had seen nothing inconsistent in July vs. prior months.

The high end of the market is expected to be better resilient against an economic downturn which could American Express profit from. Although rising expenses are a risk, I expect management to reduce them. It’s a plus that in current difficult market conditions AXP remains to its long term financials goals.

AXP has a strong balance sheet and a good management. Analysts are revising their earnings forecasts upwards, which is a big plus. Momentum is strong and AXP has a P/E of 11.3x expected earnings for the coming year. This is above the sector but lower than its own historical average.


JPM reported strong second-quarter earnings that beat expectations. EPS was $1.27 in 2Q11 against $1.09 a year before (+17%) and higher than market expectations of $1.21. Net income increased 13% in the second quarter to $5.4 billion which was also better than the expectations of $4.8 billion. Operating profit, which is less volatile because it’s pre-provision, was $10.6 billion, up 8% qoq but 4% down yoy.

For the credit card portfolio the company expects the net charge-offs (the difference between gross amount of loans charged off as bad debt and recoveries collected from earlier charge-offs) to improve next quarter and approach a more normalized credit environment. For the mortgage portfolio delinquency and net charge-offs improved modestly but remained high. JPMorgan expects credit losses to remain elevated and there is a possibility that despite the current reserves there will be additional costs.

JPMorgan reported a strong balance sheet and good capital ratios. In the second quarter the company used $3.5 billion to buy back shares, and will continue to do so opportunistically. Based on Basel III JPMorgan has a Tier 1 Common ratio of 7.6% which is, according to the management, sufficient for the moment and probably higher than the level required for the coming five years. Management doesn’t see the need for higher capital ratios ahead of time.

JPMorgan didn’t give a precise outlook for the rest of the year, but sees growth opportunities for the future. The company is expanding within the United States as well as abroad

JPM has a strong balance sheet, good capital ratios and is able to buy back shares. Although JPMorgan performed in line with the sector, the stock is cheaper. You pay 7.2x for this year and 6.5x for next year's expected earnings. Also the price-to-book of 0.78 is in its advantage.

Wells Fargo (NYSE:WFC)

Wells Fargo reported better than expected second-quarter results. Loan growth improved (core loans were up 4% qoq) as well as credit quality. Capital ratios also improved with a Tier 1 Common equity ratio under Basel III of 7.4%. Management remains focused on improving efficiency and WF is one of the few banks that started early with aggressively reducing costs. There for it’s ahead of its peers. WF has limited exposure to sovereign debt of peripheral Europe.

The company is active in multiple markets, which gives it a more defensive character. Although mortgages are its main business, it is far healthier and ahead of its competitors Bank of America and Citigroup. It has a strong balance sheet, and the company is efficiently run by management. Analysts are revising their earnings forecasts upwards, which is a big plus.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.