Bank Earnings To Be Clouded By Huge Discounts To Book Value (JPM, WFC, BAC, C, GS)

This Friday is going to mark a key earnings day when we get earnings from J.P. Morgan Chase & Co. (NYSE: JPM) and Wells Fargo & Co. (NYSE: WFC).  These two earnings reports will act as a prelude for earnings next week from the likes of Bank of America Corporation (NYSE: BAC), as well as Citigroup, Inc. (NYSE: C) and for Goldman Sachs Group Inc. (NYSE: GS).  One metric we will be paying close attention to is the persistent underperformance of these banks against their book values.  Unfortunately, we continue to look at book value in most cases as a ceiling rather than a floor.

Wells Fargo & Co. (NYSE: WFC) is the one money-center bank that trades at a premium to its book value.  At $32.97, its book value per share at the end of the first quarter was $25.45.  We expect this book value to have increased yet again. The bank reported the first quarter figures as follows: “Tier 1 common equity under Basel I increased $4.4 billion to $99.5 billion, with Tier 1 common equity ratio of 9.95 percent under Basel I at March 31, 2012. Under current Basel III capital proposals, Tier 1 common equity ratio estimated at 7.81 percent, an increase of 31 basis points from prior quarter.” Thomson Reuters currently has estimates of $0.81 EPS and $21.32 billion in revenue. This is our safest bank in America of the money center banks, and it is also Warren Buffett’s favorite bank.

J.P. Morgan Chase & Co. (NYSE: JPM) book value per share was $47.60 against the current price of $34.25 and against a 52-week range of $27.85 to $46.49.  Shares were just above $40.00 per share before the London Whale losses surfaced and the loss of up to $4 billion may be larger than had been disclosed.  At the end of the first quarter the fortress bank reported the following: Basel I Tier 1 common of $128 billion, or 10.4%; estimated Basel III Tier 1 common of 8.4%.  With such a large loss from trading or hedging we do not expect that book value per share will be up substantially as of June 30. Thomson Reuters currently has estimates of $0.78 EPS and $21.93 billion in revenue.

Bank of America Corporation (NYSE: BAC) remains challenged and at $7.50 its book value at the end of the first quarter was $19.83 and its tangible book value per share was listed as $12.87. At the end of the first quarter BofA noted a record Tier 1 Common Equity Ratio of 10.78% and its Tier 1 capital ratio was 13.37%.  Unless BofA had any unknown major losses, we expect an uptick to tangible book value. Thomson Reuters currently has estimates of $0.15 EPS and $22.83 billion in revenue.

Citigroup, Inc. (NYSE: C) is trading close to $26.00 and its 52-week range is $21.40 to $40.50.  Its first quarter book value per share was $61.90 and its tangible book value per share was$50.90. The bank reported a Tier 1 Common Ratio of 12.4% amd noted at the end of the first quarter, “We continued to wind down our Citi Holdings legacy portfolio, which now stands at 11% of our total assets, while further building capital. With a Tier 1 Common Ratio of 12.4% under Basel I and an estimated Tier 1 Common Ratio of 7.2% under Basel III, we continue to be one of the best capitalized banks in the world.” Thomson Reuters currently has estimates of $0.90 EPS and $18.93 billion in revenue.

Goldman Sachs Group Inc. (NYSE: GS) trades at $94.25 and its 52-week range is $84.27 to $139.25.  At the end of the first quarter its book value per common share was $134.48 and its tangible book value per common share was $123.94.  Its Tier 1 capital ratio under Basel 1 was 14.7% and the firm’s Tier 1 common ratio under Basel 1 was 12.9%. Thomson Reuters currently has estimates of $1.27 EPS and $6.51 billion in revenue.

Read Also: The 7 Safest Banks in America

JON C. OGG