A Capitalization Correction (NYSE: BAC) (NYSE: WFC) (NYSE: C)

NEW YORK - Banking stocks got a much needed break from the sell off over the last two months which has wiped off $175 billion of value off of the 6 largest banks in the U.S: BAC, JPM, C, WFC, USB and PNC. PNC has participated the least in the decline as it is only down 9.2% from its 52 week high vs. a 6% decline for the S&P 500. BAC is down 33%, WFC is down 24%, JPM is down 15%, USB is down 16% and Citigroup is down 28%.

The banking sector's struggles are even more puzzling when one compares their values now to the ones before the financial crisis.

In Aggregate the value of these 6 banks on Jan 1 2007 was a market capitalization of $872 billion. BAC (Click here for the BAC report) had one of $240 billion vs today's $108 billion a loss of $132 billion. JP Morgan has gained only $4 billion of market cap from $158 billion. Citigroup has lost $161 billion of value from $271 billion to $110 billion. The bank's valuation is puzzling for two reasons. 1) How low it is and 2) that it is above Bank of America's despite its troubles. Wells Fargo (Click here for the WFC Report) has gained $23 billion of value from $115 billion to $138 billion of today despite them more than doubling their assets and almost profits. USB has lost $15 billion of value from $62 billion to $47 billion despite being one of the biggest banks that will benefit from the crisis because of the assets it has been able to buy. Last but certainly not least, PNC (Click here for the PNC Report) financial has seen its market capitalization grow from $26 billion to $31 billion despite the fact is has more than doubled its assets and nearly tripled its profitability.

In aggregate banks market capitalizations have shrunk by $276 billion to its current total market capitalization of $596 billion before the crisis their market values were $872 billion or a loss of 32% of the bank's value and their stocks are down on average 44%.

What is so puzzling about this number is the fact that market capitalization and stock price are different. Since the financial crisis BAC has issued $90 billion ( a lot of is from the Merill Lynch acquisition) of stock. Wells Fargo has issued $44 billion. J.P. Morgan has issued $20 billion. Citigroup has issued $82 billion. USB has issued $2 billion and PNC has issued $10 billion. What is amazing on some of these totals is many of the banks trade around what they issued. BAC trades $15 billion above the amount of capital it has issued.

One more final analysis to demonstrate how undervalued these stocks are. PNC has $139 billion more of assets, JPM has $600 billion more. Wells Fargo has $625 billion more. Citigroup has $200 billion less. BAC has $500 billion more and USB has $70 billion more. In aggregate all the six largest banks in the U.S. can be bought for $596 billion down from $872 billion on January 1, 2007 despite having $2.1 trillion in more assets.

If market capitalization had reached 2007 levels that would be one thing. But it is amazing to see stocks down 44% from 2007 levels and market capitalizations down 32%. The banks issued so much equity during the financial crisis that market capitalizations should be higher than their 2007 levels. These are simply much larger banks which deserve bigger capitalization. Share prices may not reach 2007 levels for a long time but we need a capitalization correction.

Even if market capitalization equaled 2007 levels banks stocks would still be down on average 33% from 2007 levels. So there is a disparity right now between value and stock price. People are putting to much emphasis on stock price and not enough emphasis on market value. BAC's stock price may deserve to be down 60% instead of 90% but its market value should be around the same as before. However on both fronts it is substantially lower.