Goldman and JPMorgan Are 2 Big Winners in the Banking Shakeout

After suffering losses yesterday, stocks are bouncing back this morning, with the S&P 500 (SNPINDEX: ^GSPC  ) and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) up 0.52% and 0.47%, respectively, as of 10:05 a.m. EDT.

Goldman and JPMorgan: More for you and me!
Last week the Financial Times reported that Dow component JPMorgan Chase (NYSE: JPM  ) was likely to wrest the top ranking in the first-quarter M&A league table from Goldman Sachs (NYSE: GS  ) for the first time in two years.

While M&A is a capital-light business, both banks are capitalizing on the aftermath of the credit crisis, in which numerous international competitors are shrinking other areas of their activity. So says Gary Cohn, Goldman president and chief operating officer and a likely successor to CEO Lloyd Blankfein. At a press briefing in Sao Paulo, Brazil, Cohn gave a frank assessment of the competitive state of the industry: "We are seeing the big international banks, outside of ourselves and JPMorgan, really taking pretty substantial steps back from the market and we haven't seen that in the entire history of banking."

He had no problem naming names, either: "If you look at what a UBS is doing or what a Credit Suisse is doing and the fact they have publicly announced they're cutting their risk-weighted assets, they're cutting their balance sheet, they are getting out of certain businesses, they are getting out of certain jurisdictions."

In October, UBS announced that it would cut 10,000 staff, effectively withdrawing from the fixed-income business, which was not deemed profitable enough under new, stricter capital requirements. As such, the remaining business becomes more attractive for remaining participants. The process Cohn is highlighting is basic economics: As supply (competition) decreases, prices (profits) increase. He did, however, remark that local institutions were providing stiffer competition in markets such as Brazil, Singapore, Tokyo, and Hong Kong.

In summary: As international banks retreat from parts of the securities industry, JPMorgan and Goldman are the biggest beneficiaries. Despite this, as of yesterday's close, Goldman's shares were valued at a minimal 7% premium to their tangible book value, which suggests that investors expect little to no economic profit. Before you conclude that this is an obvious underpricing, you may want to consider that Warren Buffett recently gave up the option to purchase $5 billion worth of Goldman shares at $115, or roughly a one-fifth discount to their current price.

With big financial institutions still trading at deep discounts to their historic norms, investors everywhere are wondering if this is the new normal or if finance stocks are a screaming buy today. The answer depends on the company, so to help you figure out whether Goldman Sachs is a buy today, I invite you to read our premium research report on the company today. Click here now for instant access!

Read/Post Comments (0) | Recommend This Article (1)

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2346315, ~/Articles/ArticleHandler.aspx, 9/30/2016 6:06:05 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 8 hours ago Sponsored by:
DOW 18,143.45 -195.79 -1.07%
S&P 500 2,151.13 -20.24 -0.93%
NASD 5,269.15 -49.39 -0.93%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/29/2016 4:35 PM
^DJI $18143.45 Down -195.79 -1.07%
GS $158.95 Down -4.50 -2.75%
Goldman Sachs CAPS Rating: ***
^GSPC $2151.13 Down -20.24 -0.93%
S&P 500 INDEX CAPS Rating: No stars
JPM $65.65 Down -1.06 -1.59%
JPMorgan Chase CAPS Rating: ****