J.P. Morgan (JPM), Citigroup (C), Bank of America (BAC) and Goldman Sachs (GS)
I wrote a blog post on these four back in January, (One of my first blogs) highlighting that all four were trading below EBV-3 and the possible reasons for this (here). Since my blog post was written, J.P. Morgan (JPM) and Goldman (GS) came out of the blue, transited up through EBV-3. I noted this and other financials transiting positively, which was a welcoming sign that economically speaking things were looking positively for these financial institutions and for the economy.
In the last weeks, every one of the highlighted financial institutions, JPM and GS, as well as other highlighted financials has reversed course and transited back under EBV-3. Have assets on these banks’ balance sheets turned that quickly or is there a larger issue at work here?
One thought I did have, in the wake of JPM’s trading loss that Jamie Dimon announced, is that the market is now differentiating between money center – investment banks and retail branch banking banks. Let’s look at a few examples.
J.P. Morgan’s (JPM) Model Price chart.
JP Morgan with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
Citigroup’s (C) Model Price chart
Citigroup with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
Bank of America’s (BAC) Model Price chart
Bank of America with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
Goldman Sach’s (GS) Model Price chart
Goldman Sachs with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
In comparison let’s look at more retail orientated banks such as;
Wells Fargo (WFC)
Wells Fargo with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
Northern Trust (NTRS)
Northern Trust with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
US Bancorp (USB)
US Bancorp with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
PNC Financial Services Group (PNC)
PNC Financial Services with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
Some observations
1. The money-center investment banks all trade at steep discounts to accounting book value. The retail banks all trade around book or slightly above. In the current environment let’s think about this for a second. The investment banks have to deal with Dodd-Frank. This piece of legislation, which has over two thousand pages of regulation on what, is “proprietary trading” and what isn’t. Even with the recent well-publicized losses at JPM some say there is a question whether the trades were a hedge or directional trading. Well guys the market has already decided, they will sell you at a discount because of this complexity. And if the investment banks lose money the market will sell you off even more.
2. The market currently likes retail banking. Yes, dull and boring. Utility like. Not only do investors like the simplicity, it also likes the dividends. Dull, boring retail banking. The alpha dogs don’t like this business, but the market does!
3. Too many conflicts in the investment banks. Lloyd Blankfein said in a recent Bloomberg interview, that yes there were conflicts in his business however he sees no problem with this and that “they” can manage these conflicts when they arise. My mouth dropped on my desk, first on the admission of conflicts (big admission that everybody now knows) and when I scooped my mouth off the desk, I chuckled about Goldman managing their own conflicts.
What Am I Saying?
Assuming asset quality is roughly the same in all the above noted financial institutions (big assumption but not huge) then the market seems to be discounting complexity, conflicts and exotic derivative trading and rewarding boring, process banking, simple to understand and dividend paying.
If the CEO’s of JPM, C, BAC, and GS were to turn your back on hedge fund like trading, Dodd Frank, and intra-company conflicts the market, it seems, will reward you. Here is a thought, pretend the Glass Seagall is alive and guide your company appropriately and the market will add billions to your market value.
How will we know this?
There could be some formal announcement or managements could quietly shift their business away from the complex areas listed above and invest in areas that WFC, NTRS, USB, and PNC are currently dominating. Also, keep in mind the Federal Reserve can approve dividend increases and share buy backs if these financial institutions behave appropriately, as well.
Of course the market will know this, quicker than anybody else. So we will again look for positive transits above EBV-3 and will notify you accordingly.
Beginning the 21st century, with the repeal of Glass Seagall, the market loved the concept of financial giants delivering financial services, from insurance, mutual funds and investment banking. Twelve years later, and 20/20 hindsight, this has led the United States to the doorstep of financial ruin. Also, we are living through the total overhaul of the US financial system since the great depression. Interestingly, the market seems to be voting with market value where it wants this industry to head. Dare I say Canadian Bank like!
Model Price 