NEW YORK -Since August 26 the date that most money managers officially comeback from vacation, the banks have exploded in valuation. Yet some banks have been left standing still in a matter of speaking compared to other banks.
Bank of America the largest bank in the United States is only up 11% since August 26 while the average bank is up 25%. BAC (report) has lagged the consensus due to the mortgage putback fiasco. A putback is a loan which was once sold to another institution that may have to be bought back. This triggers losses as the loans were sold at higher prices then they are worth today. As well the company has continued to show poor operating profits. Despite this the company is positioned to profit going forward and sells at the cheapest price among peers to tangible book value. Even Citigroup trades at a higher premium of 12%, compared to BAC's 5%.
PNC Financial (report) has also lagged its peer group up a disappointing 21% since August compared to Wells Fargo which is up 41%. Wells Fargo has approached fair value at record speeds compared to PNC. PNC, WFC, USB and JPM are largely regarded as the strongest banks in the country. Each of these banks have continued to post record or near record profit despite the recession (The only bank in this group to not post a record profit this year was USB). J.P Morgan and PNC trade at a steep discount to tangible book value compared to WFC and USB which trade at nearly two times book.
Weaker financial institutions including BBT trade at nearly twice tangible book value despite posting lagging profits. BB&T trades at an annualized PE of 23 based on their last quarters numbers. While PNC trade at an annualized PE of under 10. PNC also is known to have higher loan quality and more provision for loan losses. This means earnings are likely to improve more quickly as credit reserves are released instead of being added.
Bank of New York Mellon and State Street who have seen their shares rise over 30% since August presumably trade at a premium due to their relatively stable businesses.
As we sit here and look at the banks it is safe to assume that PNC, JPM, and BAC are likely to move up the most in the next year. Especially JPM and PNC which are two of the highest quality institutions but have lagged USB and WFC when it comes to valuation. This will need to change going forward.
Perhaps what PNC and JPM need is a Warren Buffett vote of confidence. Buffett the legendary investor from Omaha Nebraska has a major position in two U.S. Banks, USB and WFC. It is no surprise that money managers give these banks the highest premiums when they pursue copy cat investing instead of thinking. In the long term all of these institutions should move up significantly.
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