Big U.S. banks are in better shape than they have been in years, and yet they trade at levels last seen in 2011. Why Citi, JPMorgan, BofA, and Wells Fargo could jump 20%.
Everyone knows that stocks have had a miserable January, one of the worst ever, but what they don’t know is that it could be a good sign. Even after rallying on Friday, the Standard & Poor’s 500 index finished the month down 5.1%. That’s the seventh-worst start since 1950, based on data from the Stock Trader’s Almanac. It’s encouraging, though, that five of the six weaker Januarys were followed by gains in the rest of the year.This year, with declines in oil and other commodities raising concerns about global economic growth, investors have gravitated toward defensive sectors, like telecom and utilities, which finished higher in January, while dumping financials, technology, and materials stocks.For banks and tech, there are strong arguments for recovery (see “5 Battered Tech Stocks to Buy Now”).
Bank stocks got off to a particularly weak start, with the widely followed KBW Bank Index of 24 companies, known as the BKX, falling 13%, led by big losses for the largest banks. Citigroup (ticker: C) declined 18%, to $42.50, and Bank of America (BAC) was off 16%, to $14; Morgan Stanley (MS), which is technically a bank but more of an investment bank, fell 19%, to $26.With the selloff, the banking sector looks like one of the best bargains in the market. “This is an exciting time,” says CLSA banking analyst Mike Mayo. “Bank balance sheets are as strong as they’ve been in decades, and stock prices resemble recession troughs. Earnings are more stable than they have been in decades, and capital ratios are at the highest levels in 80 years.” Credit Suisse analyst Susan Katzke calculates that nine big banks she covers have tangible equity capital ratios averaging 8% now, double the levels in 2007, prior to the recession.At its nadir last week, the BKX index was at its lowest level since mid-2013, and valuations were back to levels last seen in 2011, when the stock market was rattled by fears about Greece’s financial crisis.
As the table shows, the 10 leading banks and investment banks now trade for eight to 12 times projected 2016 earnings—a steep discount to the market multiple of about 16—and many trade near or below tangible book value. Some sport yields of 3% or more, and all will probably get the regulatory go-ahead to lift dividends later this year.
Tangible book, a conservative measure of shareholder equity, excludes goodwill and other intangible assets, which usually stem from acquisitions. It’s often viewed as a measure of liquidation value and doesn’t give banks credit for franchise value and low-cost deposit bases.There’s probably at least 20% upside in all of these banks, which would still leave some below where they started the year.“We’re constructive,” says Jason Goldberg, a banking analyst at Barclays. “The concerns we have are more than reflected in current valuations.” He says eight of the 22 banks in his coverage traded below tangible book value last week. The last three times that happened—in summer 1990, early 2009, and August 2011—turned out to be excellent buying opportunities.WHAT ARE THE KEY ISSUES now? Wall Street is worried about the industry’s loans to the increasingly distressed U.S. energy sector. But based on information provided on banks’ energy exposure in fourth-quarter earnings releases and presentations on conference calls, that exposure looks manageable. Oil-and-gas companies generally account for no more than 1% to 3% of total loans, and banks already have set aside reserves against potential losses.On the Wells Fargo (WFC) call, for instance, executives said they believe the bank to be adequately reserved for its $17 billion of disclosed energy exposure. CEO John Stumpf said the situation for banks now is better than it was in the 1980s, when energy prices collapsed. One reason is that much of the debt on the books of energy borrowers is subordinate to bank debt, giving banks more cushion....MUCH MORE
We started sniffing around in March 2015 with "'Big Banks Announce Plans To Return More Cash To Shareholders. (XLF)"
And got serious in September:
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