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.