How much is the Fed driving home prices?
Recently, I have been keeping an eye on two US banks – Wells Fargo (NYSE: WFC, USD 32.93) and US Bancorp, (NYSE: USB, USD 31.74). They kind of look interesting and financials in general still tend to be “underowned”. Both are amongst the largest deposit gatherers in their respective markets. Similarly, revenues are about equally split between interest spreads and non-interest (fees & commissions). Lastly, the respective leverage is relatively low at approx. 10x. This compares favourably vs peers around the world e.g. Australia 15x, UK 15x, Canada 17x, Europe (ex UK) 23-40x.
Wells Fargo is slightly cheaper as it trades at a slightly larger discount to fair value than US Bancorp. A partial explanation may come from the composition of the non-interest related income; at Wells Fargo, the largest portion (27%) comes from Mortgage origination/servicing whereas US Bancorp’s biggest contribution comes from payment services (credit, debit, truck fuel cards, merchant processing).
While some investors are becoming more optimistic about the US housing market thanks to slowly rebounding house prices, it is worthwhile to keep in mind that many foreclosures are still stalled in courts, holding back additional (cheap) supply. Moreover, Fed policy continues to distort the interest rate landscape leading to lower than normal mortgage rates. Barry Ritholz posted the interesting graph above illustrating the impact of lower rates on the affordability of monthly mortgage payments.
Coming back to the two banks – Wells Fargo looks cheaper, but has significant exposure to mortgages, both on the interest spread and non-interest side which is the main reason for not pulling the trigger. US Bancorp would probably be the more conservative choice.