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Saturday, 23 August 2014

Going fourth

Big U.S. banks have plenty to prove in 2013

Big U.S. banks have plenty to prove in 2013. Wells Fargo aside, valuations have languished below book value. After a strong 2012 for stock markets and with fourth-quarter earnings reports imminent, JPMorgan and Goldman Sachs are again near that level. But when they get there, it will be a relief rather than anything to crow over.

Bank of America doubled its market capitalization last year while JPMorgan added a third to its value in spite of the blow it suffered from the so-called whale trade that went awry. Yet the advances really only made up for ground lost the year before. Sure, banks worked through more of their post-crisis hangovers and investors gathered more confidence in them. But there’s little sign of a noticeably brighter future.

One problem is that most giant financial institutions are still struggling to deliver returns on common equity that match their cost of capital, often taken to be around 10 percent. Investment banking top dog Goldman, which booked 30 percent-plus ROEs in the run-up to 2008, is still in single digits for the first three quarters of 2012. JPMorgan did a bit better over that period, but other factors - perhaps including the memory of the whale trade - are also in play.

And fourth-quarter earnings aren’t expected to signal anything more cheerful. Fiscal temporizing in Washington and the interruptions caused by Hurricane Sandy probably took a bite out of trading revenue, while recent mortgage foreclosure settlements could mar earnings. News this week of more job cuts at Morgan Stanley is a reminder that headcount, pay or both remain too high in places.

Still, the better-placed Wall Street firms at least are seeing their shares trade near their reported book value. Goldman is closest, at a modest 2 percent discount to book value on Thursday. That should help Chief Executive Lloyd Blankfein relax a bit.

But Blankfein and his counterparts across the industry still need to squeeze out costs and show they have profitable businesses for the new market normal. They have to learn to live with the strictures and costs of still-solidifying new regulations. And they need to work through more of the mortgage litigation which continues to bite. Step by step, the banking bigwigs can show investors they are putting these concerns behind them as 2013 unfolds. But they can’t do much about Washington’s inability to decide on a fiscal course. No wonder investors remain wary.

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Context News

Wells Fargo will be the first of large U.S. financial institutions to report fourth-quarter earnings when it releases its results on Jan. 11. Goldman Sachs, JPMorgan, Morgan Stanley, Bank of America and Citigroup all report the following week.

In afternoon trade on Jan. 10, Goldman shares were trading at 98 percent of the book value per share of $140.58 reported at the end of the third quarter. JPMorgan shares were trading 8 percent below book. Investors value Morgan Stanley, BofA and Citi at more than 30 percent less than their book values.

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