NEW YORK - U.S. Banks now trade near tangible book value the lowest value a stock can theoretically trade as long as investors don't expect negative earnings or earnings which are so low that there would be more value in dissolving the company today.
Bank of America has tangible book value of $135 billion and currently trades at $72 billion. Lets say BAC will have another $20 billion of losses or $13 billion after tax a draconian amount but even with this BAC has a price to tangible book of 0.58. A revaluation just to tangible book value is a 72% return.
The second largest bank J.P. Morgan has tangible book value of $121 billion. The company currently trades at $134 billion. Giving a ratio of 1.1. JPM is earning 17% ROE currently, to be trading at tangible book on superior returns makes little sense.
The third largest bank Citigroup has tangible book value of $140 billion and currently trades at $85 billion or a price to tangible book of 0.6. The company earned 3.2 billion in their latest quarter certainly not a small sum which gave the company a return on tangible equity of close to 10%. Certainly not a sum that is so low that requires a discount to the tangible book value. Considering Citigroup's difficulties this low return is expected but will likely improve. Even with this low return the price is impossible. A revalue just to tangible book value is a 66% return.
Wells Fargo the nation's fourth largest bank by assets has tangible book value of $98 billion. The company currently trades at $122 billion or 1.24 to one. The company in their latest quarter earned $3.8 billion. The return was close to 18% on opening equity. Certainly not a nothing return yet the stock trades at its liquidation price despite posting excellent results.
U.S. Bancorp the nation's fifth largest lender has tangible equity of $21 billion and trades at $42 billion. Or a price to tangible book of 2 to 1. The company earned $1.2 billion in their latest quarter. The return on tangible equity for the company is close to 25% a premium amount and certainly one that warrants a bank being hired at a much higher price to tangible book. Royal Bank of Canada has a price to tangible book of 2.3 to 1 despite having a return of around 18%.
PNC Financial the nation's fifth largest lender has a tangible book value of $23 billion or is trading at a price to tangible book of $1.04 to 1. This is despite the banks near 17% return on tangible equity which defies how investors can value a company earning abnormal returns at a catastrophe insurance companies price.
All of these banks may see earnings drop and perhaps this means the returns are lower however that is in the near future. In the long term earnings should be much higher than today and some banks such as PNC, WFC and JPM continue to produce record results.
The current prices to price the stocks as if we were in a global meltdown makes little sense.
Hi Josh,
ReplyDeleteWhat happened to all the contributing comments including one on the question of European bank contagion? You did a reply to that one, right?
Ya I did, U.S. Banks don't have much exposure to it. Outside of non banks like GS, MS or insurers which I don't currently look at.
ReplyDeleteI know BAC, JPM' have the most exposure and its pretty minimal. JPM has $15 billion of total exposure but to assume a $15 billion loss would be incredibly dumb. JPM'S CEO says the most possible is $3 billion. which makes sense since all this debt is not greek and the chance of all those countries defaulting has to be close to zero. BAC has even less exposure. Obviously PNC, WFC, and USB have no exposure.
The European contagion is a minor issue.
Regulation is the main issue which destroys the economy and lowers returns. I do not believe the draconian type regulation will be passed but even if it is the banks were attractive at last months prices by a long shot. Now at these prices they are valued below liquidating prices.
BAC might as well dissolve but since the market is so stupid it gives smart investors the chance to get in. Then BAC PNC etc will revalue and you will get back to tangible book then above to compensate for real returns.
"BAC might as well dissolve"? What is the basis for this comment? On one hand you say the company is trading at an unreasonable discount and then you say it should dissolve.
ReplyDeleteI wrote is as the company can liquidate at twice the value of its stock. My point is liquidating creates more value in the immediate term for shareholders. However I believe smart investors can get in at this discounted price and make twice the return.
ReplyDeleteIf you can make 70% on BAC just to get back to my adjusted tangible book. You will have a hard time losing money buying a stock knowing that.
Then I followed up and said but you would not want that because you can buy BAC at half its liquidation price and get future earnings for free.
I don't really cares what anyone says about risk. When BAC was at $12 I didn't care about their risk certainl at $6.8 I don't care at all. I think risk was overpriced in when the stock was at $12.