You hear it all the time… “This bank is so cheap against book value that it cannot go lower.” Book value, and even tangible book value, has become a pre-recession metric that just does not matter in the current banking climate. In many cases, calculating a bank’s book value can be a bit like calculating the cash per share of an emerging biotech that just experienced an implosion due to a poor drug candidate’s test result.
J.P. Morgan Chase & Co. (NYSE: JPM) will lead off the banks as far as earnings season. It is likely that book value here grew or did not fall much and we will be paying attention to Jamie Dimon’s comments on how his internal customers’ credit metrics came out in Q3. Jamie Dimon showed that book value was listed as $44.77 versus $43.34 the first quarter and versus $40.99 a year earlier. If Chase is the best quality of the money-center banks that there is, then a $33 handle today generates close to 0.75-times book value.
Bank of America Corporation (NYSE: BAC) noted in July that tangible book value per share was $12.65, down from $13.21 in the first quarter of 2011 and up from $12.14 in the second quarter of 2010. Its stated book value per share was listed as $20.29 as of June 30, down from $21.15 in the first quarter and down from $21.45 in the same period of 2010. Shares are trading under $6.50 today. The trick is not that Bank of America is lying about the book value today. We think that the number was actually true based upon a snapshot in time, but the issue is that the street cannot figure out how to model its mortgage exposure and lawsuit exposure and what that does to the book value a year or two out. What if regulators move to press for a break-up of if the company remains under pressure for the long-haul. What if they keep losing customers over the $5.00 fee for using debit cards for buying goods. Also, Bank of America is expected to have a loss this quarter and its charges and other issues have likely continued to pressure the book value metrics. What is there to say about the likely direction of the book value for the foreseeable future.
We ran a screen of banks trading at or under book value from the last quarter under the FinViz screen. Book value should be considered a ceiling rather than a floor for the time being. Ultimately that will change, but we live in a climate where banks are winding down prop-trading, not going for many loans, are not able to earn money in the short-term and intermediate-term fixed income markets, being sued over and over for actions of yesteryear, are under more and more regulation, and more. There is just no real good news that is evident yet and shareholders are going to not care about book value any time soon.
A screen at FinViz gave some key banks valued at over $10 billion and trading under book value, and that is generally the stated book value rather than the tangible book value. We would note that the price changes of the shares may alter these numbers slightly as the prices move up and down into and during earnings season. We have also included earnings estimates for the quarter from Thomson Reuters to show which banks have a shot at higher book value rather than the banks losing money:
BB&T Corp. (NYSE: BBT) trades at 0.92-times its latest book value. Earnings estimates for the quarter are $0.49 EPS.
The Bank of New York Mellon Corporation (NYSE: BK) trades at 0.69-times its latest book value. Earnings estimates for the quarter are $0.53 EPS.
Citigroup, Inc. (NYSE: C) trades at 0.46-times its latest book value. Earnings estimates for the quarter are $0.84 EPS.
Capital One Financial Corp. (NYSE: COF) trades at 0.68-times its latest book value. This one is in the midst of digesting additional purchases so tallying up a relevant book value may be a couple of quarters out. Earnings estimates for the quarter are $1.68 EPS.
Fifth Third Bancorp (NYSE: FITB) trades at 0.80-times its latest book value. Earnings estimates for the quarter are $0.33 EPS.
The Goldman Sachs Group, Inc. (NYSE: GS) trades at 0.68-times its latest book value. Earnings estimates for the quarter are $0.37 EPS.
Morgan Stanley (NYSE: MS) trades at 0.50-times its latest book value. Earnings estimates for the quarter are $0.34 EPS.
PNC Financial Services Group Inc. (NYSE: PNC) trades at 0.81-times its latest book value. Earnings estimates for the quarter are $1.49 EPS.
SunTrust Banks, Inc. (NYSE: STI) trades at 0.51-times its latest book value. Earnings estimates for the quarter are $0.35 EPS.
As a reminder, earnings from operations do not assure that any growth will have been seen in stated book value nor in tangible book value.
An exception to the rule: Wells Fargo & Company (WFC) at 1.01-times its most recently stated book value. Wells Fargo is around $27.00 now, although the book value per share was listed as $23.84 in its July earnings report. Earnings estimates for the quarter are $0.72 EPS.
Until Wall Street investors can figure out where these banks are going to make their profits and until Main Street and state and federal agencies stop putting severe pressure on the banks, what good is book value? Book value is current a ceiling rather than a floor.
Value investors and investors screening for “cheap stocks” still need to look elsewhere, unless they know how to model worst case scenarios for about a year or two out from today.
JON C. OGG