The new proposed stress tests are just one more thorn in the side for the banking sector, but analysts from Dick Bove to Meredith Whitney, as well as value and bargain investors and short-selling hedge funds, routinely have an opinion on the banking sector and on individual banks almost daily. Some are good, some are just awful. It seems amazing on the surface if you just look at the screens of the largest banks trading at or under book value. Unfortunately, that implied book value for the foreseeable future is going to be a cap rather than a floor as the market tries to digest the real long-term earnings power being far lower ahead. The trick in evaluating book value is avoiding the obvious value traps.
It still feels as though calculating a bank’s book value is 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. The value may be eroded through time. Now that earnings season has passed. 24/7 Wall St. has run a screen of the money-center banks, large broker-dealers, and super-regional banks trading at or under book value from the last quarter under the FinViz screen.
J.P. Morgan Chase & Co. (NYSE: JPM) now trades around $25.30 and its October earning’s book value was listed as $45.93 per share, up from $44.77 one quarter earlier and versus $42.29 a year earlier.
Bank of America Corporation (NYSE: BAC) is almost embarrassing, or actually it is embarrassing. After a 2% drop to $5.36 today, BofA’s tangible book value per share in October was $13.22 versus $12.91 a year earlier and compared to $12.65 in the second quarter. The stated book value per share was $20.80 in the third quarter, down from $21.17 a year earlier and up from $20.29 in the second quarter of 2011.
Citigroup, Inc. (NYSE: C) is another large discount to book value and the $24.60 price compared to a stated book value $60.56 per share and a tangible book value per share of$49.50.
Wells Fargo & Company (NYSE: WFC), Warren Buffett’s favorite bank, used to trade at a premium to book value but that now trades at 0.93-times its most recently stated book value.
A screen at FinViz gave some key banks that are large and well-known institutions, some of which have no exposure to Europe and/or the PIIGS to speak of, which are trading at a discount to their stated book value. Others screened from FinViz are as follows, and these banks are all expected to be profitable on an operations basis ahead:
The trust and fiduciary banks are also at discounts. BB&T Corp. (NYSE: BBT) trades at 0.88-times its latest book value. The Bank of New York Mellon Corporation (NYSE: BK) trades at 0.66-times its latest book value.
Other regional and large banking outfits are at large discounts too… Capital One Financial Corp. (NYSE: COF) trades at 0.64-times its latest book value. Fifth Third Bancorp (NYSE: FITB) trades at 0.81-times its latest book value. The Goldman Sachs Group, Inc. (NYSE: GS) trades at 0.64-times its latest book value. Morgan Stanley (NYSE: MS) trades at 0.64-times its latest book value. Jefferies Group, Inc. (NYSE: JEF) is just about to have a quarter-end but it trades at 0.64-times its latest book value. PNC Financial Services Group Inc. (NYSE: PNC) trades at 0.78-times its latest book value. SunTrust Banks, Inc. (NYSE: STI) trades at 0.47-times its latest book value.
As a reminder, our take is that even if the market were to suddenly recover, tangible book values would be the first line to watch and stated book value would be much later after that. The book value game is one that looks and feels shockingly cheap today because the sector’s earnings power is being challenged each and every day. Until the climate moves beyond winding down prop-trading, not going for many loans, not being able to earn money in the short-term and intermediate-term fixed income markets, and a climate where these are sued over and over for actions of yesteryear and with the regulators running the banks.
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 or if they think they can quantify the regulatory, legal, and operating restriction-adjusted earnings ahead.
JON C. OGG