Book Value Discounts May Matter In Key Bank Earnings (JPM, WFC, BAC, C)

Friday morning will mark the start of earnings season as far as the financial sector and the money-center banking giants are concerned.  While there was a strong rally in the first quarter in financial stocks, some of these have pulled back in April ahead of earnings season.  With both J.P. Morgan Chase & Co. (NYSE: JPM) and Wells Fargo & Co. (NYSE: WFC) reporting earnings on Friday morning, we cannot help but wonder how much book value is going to play into the equation this earnings season.

It is important to remember that Wells Fargo and J.P. Morgan are the two healthiest of the big money center banks even if they are in the too big to fail category.  Wells Fargo trades at a premium to its book value because it will suffer the least from the coming Dodd-Frank regulations around trading as they are more of a traditional bank.  J.P. Morgan Chase is still at a discount to book value, but the real discounts are in Bank of America Corporation (NYSE: BAC) and in Citigroup, Inc. (NYSE: C).

Most banks have gotten permission to raise their dividends and buy back shares.  Suddenly the book value per share could come back into play.  It could even be argued at some point down the road that 2011’s bank stock crash may have been the gift of a decade if we ever get back to where book value becomes a floor rather than a ceiling.  We have given earnings previews for each of the four money center banks.

J.P. Morgan Chase & Co. (NYSE: JPM) reports on Friday and shares are around $44.50 against a 52-week range of $27.85 to $46.49.  Its consensus price target from Thomson Reuters is now up to almost $52.50.  Its most recent book value was listed as $46.59, up from $45.93 at the end of the Q3-2011 period and up from $43.04 at the end of 2010.  Thomson Reuters has estimates of $1.18 EPS on $24.68 billion in revenues.  Here is why I was disappointed with J.P. Morgan’s dividend hike.

Wells Fargo & Co. (NYSE: WFC) also reports earnings on Friday morning and its current price of $33.70 compares to a 52-week range of $22.58 to $34.59. The Thomson Reuters consensus price target is now up to $37.53 on Wells Fargo.  Its most recent book value was $24.64, and that book value was up 10% from the $22.49 reported at the end of 2010.  Thomson Reuters has estimates of $0.73 EPS and $20.46 billion in revenues.

Bank of America Corporation (NYSE: BAC) is now back up to $9.00 against a 52-week trading range of $4.92 to $13.33.  Thomson Reuters has a consensus target that is currently $9.89.  The bank most recently noted that its tangible book value per share was $12.95 at December 31, 2011, compared to $12.98 at December 31, 2010. The stated book value per share was $20.09 at December 31, 2011, compared to $20.99 at December 31, 2010.  Thomson Reuters has estimates of $0.12 EPS and $22.59 billion in revenues.

Citigroup, Inc. (NYSE: C) is now back around $34.30 against a 52-week trading range of $21.40 to $46.00.  Its consensus price target is $43.45 according to Thomson Reuters.  The bank most recently noted that its book value per share rose 8% from a year earlier to $60.78 per share, while its tangible book value per share was up 12% from the prior year to $49.81 per share.  Thomson Reuters has estimates of $0.99 EPS and $19.85 billion in revenues.

Book value has most recently tended to act as a ceiling rather than as a floor.  With stock buybacks continuing to come on and with higher dividend trends by the healthier banks, maybe that won’t be the case forever.

JON C. OGG