Bank Earnings to Bank On


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Kevin Kersten 01/20/2014

Most of the big banks reported earnings last week. Bank of America ( BAC ) surprised markets with positive numbers and Wells Fargo ( WFC ) also reported good earnings. For some investors, memories of the subprime financial crisis are still fresh, but it is not 2008 anymore. With the stock market at all-time highs again, banks have digested much of the aftermath and both capital controls and oversight are tighter than they have been in a long time. Banks have proven to be a great investment in the last few years although that was not what market analysts were expecting.

The four largest banks based on assets are JPM Morgan Chase ( JPM ) with $2.3 trillion, Bank of America ( BAC ), Citigroup ( C ), Wells Fargo ( WFC ) at $1.4 trillion. Wells Fargo, the smallest of the big four, has a tradition going back to the stagecoach days. Bank robberies and bank failures in those early days caused the bank to be more cautious. When the 2008 sub-prime financial crisis hit, Wells Fargo used its position as a careful bank to take over Wachovia.

When Wells Fargo reported 4th quarter results, income rose 16% from 2012 to $21.9 billion even though revenues dropped to $83.8B from $86.1B in the comparable quarter one year ago. Overall the bank has returned 1.5% of assets, up one tenth of a percent from last year. This year the company will return a 13.9% return on equity. The company has found $11.4B to buy back shares which represents about 4.7% of the $240B outstanding stock. Broken down to earnings per share, the company reported $1.00 a share beating analyst expectations of $0.98. The stock reported 3.91 per share in 2013 earnings up from $3.36 in 2012, 2.82 in 2011 and 2.21 in 2010. The stock which trades at near $45 a share has three STARS S&P hold rating.

Wells Fargo does well cross-selling products in its community banks and is applying this to Wachovia it took over a few years ago. The company has cross sold to an average of 6.1 products per household. Total average deposits in the fourth quarter were up 9%. This represents a growth strategy when the markets are already saturated with banks.

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Some may say it is too late to get into banks, but the financial positions are stronger than they were years ago and there is still room for improvement. Much of banking profits rely on the underlying economy and housing markets so things can change fast, but these profits have been good and there is room to grow.

The July 46 covered call has a  $44.28 net debit (46.40-2.12) with a 3.8% simple assigned return rate and a 7.7% annualized return rate (for comparison purposes only). The trade has about 4.6% of downside protection and the stock pays a 2.6% dividend yield. With a 2.6% dividend yield and a targeted 7.7 annualized return rate returns near 10.3% are possible.

Banking stocks have pulled in some solid numbers this quarter and they have the potential to keep making profits. While banks can continue shooting for the moon, a more cautious trade might take a covered call position and lock in that premium early on. Take a look at the numbers both in growing earnings and in the added premium a covered call can pull in.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Originally published on

This article appears in: Investing Options
Referenced Stocks: BAC , C , JPM , WFC

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