Banking, finance, and taxes

How Each Major Bank Value and Upside Looks Ahead of FOMC Decision on Rates

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Banks are just not very much in favor these days. The low interest rate policy of the Federal Reserve and the extensive regulatory environment have coincided with a period when politicians are till bashing banks. The new capital requirements and extensive oversight of lending activities and investing activities have just added layer upon layer of complexities to the major banks.

While there are problems, there are probably some serious opportunities. The question is for just how long out opportunistic investors have to consider. The ongoing worry of oil exposure is getting lower as the per-barrel price went back to $50, and a lot of value is hanging in the balance of whether Fed Chair Janet Yellen and the Federal Open Market Committee (FOMC) will hike rates in the coming week.

24/7 Wall St. has pulled the valuations of the major banks and investment banks to see where the opportunities are. One caveat: not all the great money center banks are valued equally right now, and there are many reasons for this. This coming FOMC meeting only magnifies this.

The six standout companies are Bank of America Corp. (NYSE: BAC), Citigroup Inc. (NYSE: C), Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM), Morgan Stanley (NYSE: MS) and Wells Fargo & Co. (NYSE: WFC). These have been presented in alphabetical order to prevent any confusion over ranking. Final views and observations have been included here at the end.

We have evaluated these bank and investment bank leaders first by a price-to-book ratio. This is what investors would theoretically have if they were liquidated, but do not expect that to happen any time soon. We have also evaluated their forward price-to-earnings (P/E) ratios for fiscal year 2017 earnings, and historic valuations range from eight times to 12 times earnings through time (the S&P 500 currently is valued at over 17 times forward earnings in 2017).

We have evaluated the most recent share price, the consensus price target from Thomson First Call, projected upside if that target is hit, and a 52-week range.

While some of the data are set, we took a look into why each company may be valued differently against peers. Some banks need to have Federal Reserve rate hikes more than or sooner than others. That is creating a wide disparity between forward earnings valuations for 2016 versus 2017, with most banks earning less per share in 2016 than 2015.

Bank of America has a price to book value of 0.62 to 1. Its market cap is almost $148.2 billion and its forward P/E is about 9.12. With a Thomson/First Call consensus target price of $17.37, Bank of America shares still have an implied upside exceeding 21.0%. On Wednesday’s close of trading, the share price was $14.42, and the 52-week price trading range is $10.99 to $18.48.

Bank of America remains challenged under Comprehensive Capital Analysis and Review (CCAR) guidelines and it has not been freed up to return as much capital to shareholders. This alone might bring into question the value and upside, but many bulls remain in place here as the bank is expected to be less scrutinized ahead. That 1.4% dividend yield could rise handily.

The price to book value at Citigroup is just 0.64 to 1, making it another bank at a discount to value. Its market cap is $133.6 billion and its forward P/E is less than 8.5. With a consensus target price of $56.11, Citigroup has an implied upside of 23%. Wednesday’s close had Citigroup shares at $45.56. The stock has a 52-week trading range of $34.52 to $60.95.

This remains one of the banks in which it is hard to value for many analysts and investors. Citigroup has been unleashed to give back more capital, but there are still many opportunities for asset sales and restructuring in the United States and abroad. It still comes with a low yield of 0.45%, but it is buying back stock.
Goldman Sachs is valued at 0.90 times book value. Its market cap is $67.62 billion, making it seem smaller and less important than the main banks, but Goldman Sachs manages money for the wealthiest individuals. Its forward P/E is also less than 9, but that is based on serious earnings growth as the stock is valued at 11 times expected 2016 earnings. With a consensus target price of $188.08, Goldman Sachs has implied upside of 21%. Goldman Sachs shares closed Wednesday at $154.64, within a 52-week range of $139.05 to $218.77.

Goldman Sachs is a Dow Jones Industrial Average component, and frankly its performance has been disappointing. Its yield of 1.7% is also lower than it should be. Maybe being an investment bank and being regulated with the same rules as a money center bank is not as good now as it was when it needed money in the recession.

The price to book value at JPMorgan is 1.06 to 1. Its market cap is $238.46 billion, and its forward P/E is less than 10.5 for 2017, but 2016 earnings are expected to be less than 2015 — and this year’s earnings multiple is 11.5. With a consensus target price of $70.75, JPMorgan has an implied upside of only 9%. Shares were trading at $65.25 on Wednesday’s close, and the 52-week range is $50.07 to $70.61.

JPMorgan had been trading at a discount to book value for a while, but it is back to that Jamie Dimon premium for the fortress balance sheet that used to be touted. JPMorgan remains among the banks with higher credit standards for its customers, and Dimon always did maintain that his bank would have survived without the forced bailout funds heading its way too. Its yield is almost 3%.

Morgan Stanley  has a price to book ratio of 0.75 to 1, and its market cap of $51.5 billion makes it the smallest of the most important banks and brokerages. Its forward P/E is almost 9 for 2017, but over 11 for 2017. Morgan Stanley’s consensus target price of $32.07 implies upside of about 21%. Shares were at $26.54 as Wednesday’s trading came to a close, and its 52-week trading range is $21.16 to $41.04.

Morgan Stanley’s yield of 2.2% is more impressive than some of the other banks. Still, its shares are way down from last summer and it still has muted performance in its recovery.

Trades at the largest premium to book value of the major banks is Wells Fargo, with a price to book ratio of 1.45 to 1. Its market cap is $253.7 billion, making it the largest valued bank in America. Wells Fargo’s forward P/E is less than 11.5 for 2017, and the 2016 multiple is 12.2 times earnings. With a consensus target price of $54.80, it has an implied upside of 9%. Its stock was changing hands right at $50.00 at Wednesday’s closing bell, and its 52-week trading range is $44.50 to $58.77.

Wells Fargo also likely would have survived the recession unaided, and it is the king of conventional mortgage operations in America right now. It has far lower trading operations and is better positioned than some in the regulatory climate. Wells Fargo remains almost unconstrained on its real capital return plan, buying back stock and with a 3% dividend yield that still has plenty of room to grow. The highest analyst target price is all the way up above $60.

If the analyst valuations against the consensus analyst estimates are right, then Bank of America, Citigroup, Goldman Sachs and Morgan Stanley each offer more upside than JPMorgan and Wells Fargo. Maybe that is a safety premium.

For yields today, the safe banks of JPMorgan and Wells Fargo are better for dividend investors. For that matter, Jamie Dimon and John Stumpf have a lot better position to stand up to bank regulators in this current climate.

Bank of America still looks a tad cheaper than Citigroup on a price-to-book basis, and Morgan Stanley looks cheaper than rival Goldman Sachs on a book value scenario.

As you can tell, investing in money center banks and the largest investment banks comes with some decision making: more potential upside for leveraged moves, or higher yields and safety if times do not get better for the economy or for banks?

Stay tuned: the next FOMC decision on interest rates is due in the coming week. This could make or break the earnings expectations for the major banks. One final reminder: book values and earnings estimates can often ending up being quite different from what was originally expected.

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