Bank earnings scorecard: All the numbers are in. Wells Fargo, Morgan Stanley still our favorites

With all the major investment and money center banks having now reported fiscal fourth-quarter earnings, we compiled the results to compare how our Club holdings, Wells Fargo (WFC) and Morgan Stanley (MS), stand up against the competitors. Investment banking Morgan Stanley has certainly been the place to be among investment banks, not Goldman Sachs (GS). Both reported last week on Jan. 17. The key driver of the stark contrast comes largely in non-interest income. The former was able to really lean in and harvest management’s efforts to move deeper into asset and wealth management, while the latter struggled with the build-out of its consumer-facing offering. Goldman Sachs missed expectations on both the top and bottom lines. The Dow stock sank more than 6% the day it reported, compared to Morgan Stanley, which jumped nearly 6% on an EPS and revenue beats. While marking return on average tangible common equity (ROTCE) as a miss, Morgan Stanley’s ROTCE was 13.1%, excluding one-time integration-related costs. It was much more in line with expectations than what we saw from Goldman Sachs. We think this demonstrates why Morgan Stanley’s stock warrants a premium of 13x forward earnings estimates versus Goldman Sachs’ 9.8x multiple. The intense focus on diversified fee-based revenue also serves as justification for that premium compared to where Morgan Stanley’s stock has historically been valued. Its five-year average is 10.7x. Bottom line As we noted in our earnings analysis on Jan. 17 , Morgan Stanley is firing on all cylinders and in a position to continue generating strong shareholder returns due to its more resilient fee-based revenue streams and strong capital position. Goldman Sachs, on the other hand, deserves to be in the penalty box. Goldman has only gained a fraction of a percent year to date. Morgan Stanley shares have jumped 13% in 2023. MS GS YTD mountain Morgan Stanley (MS) YTD stock performance vs. Goldman Sachs (GS) Money-center banks For Q4, JPMorgan Chase (JPM) had the cleanest results. Second place was a tossup between Wells Fargo and Bank of America (BAC). The former’s net interest margin (NIM) was quite impressive, whereas the latter really put up a great show on ROTCE. We also like to see strong non-interest income, which we feel went to BofA. In terms of which stock we like more based on these numbers, we would have to stick with Wells Fargo over Bank of America because we ultimately believe it provides a better risk/reward profile. While the efficiency ratio from Wells Fargo is pretty horrendous and the bank’s ROTCE is nothing compared to BofA, we loved that NIM — a line item that fueled a net interest income (NII) surge over the year-ago period. It’s worth noting both the efficiency ratio and ROTCE at Wells Fargo offer a ton of room for improvement as management addresses legacy issues, meets goals set by regulatory bodies, and works toward the removal of its asset cap. However, therein lies the opportunity — not something we say lightly as we can’t stand when someone sees bad results and postures a they-can’t-get-any-worse attitude. In the case of Wells Fargo, we are seeing real improvements in the business and notable catalysts that we don’t see in the others. JPMorgan was clearly the best in Q4 and that’s why it trades at a premium to the group on both a tangible book value (TBV) and on 2023 earnings estimates. Bank of America comes in second, while Wells Fargo is cheaper than both. Though Citi group does trade below TBV, which you may be inclined to view as a great opportunity, this name has consistently traded at a discount in recent years because it doesn’t generate strong returns off its book as indicated by the lowest ROTCE of the group. We view that as red flag. While Wells Fargo’s ROTCE is nothing to write home about, it has been held down by its asset cap and a bloated expense structure, which management is aggressively working to reduce. On the fourth quarter conference call, management reiterated their confidence in achieving a 15% ROTCE as they work toward the removal of the asset cap and address expenses. As noted in our earnings analysis last week on Jan. 13, if we were to adjust for a $3.3 billion operating loss related to litigation, regulatory, and customer remediation matters, $1 billion of equity security impairments, $353 million in severance expenses, and $510 million in discrete tax benefits, ROTCE would have been closer to 16%. That’s a bit above the long-term goal as NII was higher than management’s long-term expectations due to interest rates, funding balances as well as mix and pricing. As the Wells Fargo’s ROTCE increases, we would expect to see its stock’s multiple expand to a level more in line with Bank of America. Wells Fargo price-to-earnings ratio stands at 9.1x forward earnings estimates, while BofA trades at 9.6x. WFC BAC YTD mountain Wells Fargo (WFC) YTD performance vs. Bank of America (BAC) Bottom line So, again, taking valuation into account, along with the fact that Wells Fargo has clear-cut areas catalysts as milestones are met and the asset cap is hopefully lifted, we think WFC is the place to be as far as its four large money center rivals are concerned. (Jim Cramer’s Charitable Trust is long WFC and MS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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