Stocks continue to dig themselves out of the hole they dug during Monday's sell-off, with the S&P 500 (^GSPC -0.31%) and the narrower, price-weighted Dow Jones Industrial Average (^DJI -0.37%) up 0.26% and 0.25%, respectively, as of 10:10 a.m. EST.
Banks: Up, up and away?
The FDIC recently released its Quarterly Banking Profile for the fourth quarter of 2012, and it contains some interesting data on the banking industry. In 2012, the industry earned near-record profits, falling behind only the bubble-boosted results of 2006. The main reason for this surge in profits: Financial groups have been decreasing their loan-loss provisions on a year-on-year basis for 13 consecutive quarters. However, the FDIC warned that such improvements are unlikely to sustain earnings growth at the same rate in the future. Where does that leave bank-share investors?
As the following table shows, none of top eight U.S. banking groups, with the possible exception of US Bancorp (USB 1.14%), look particularly expensive -- whether on multiples of book value, tangible book value, or the next 12 months' earnings-per-share estimates. It's not unusual for US Bancorp shares to trade at a substantial premium to this group and to their own book value. Wells Fargo (WFC -0.61%), which also generally commands a premium to commercial-banking peers, looks downright attractive at just 9.5 times earnings per share:
| Company |
Forward P/E |
Price/Book Value |
|---|---|---|
|
Bank of America |
11 |
0.55 |
|
The Goldman Sachs Group |
10.9 |
1.05 |
|
US Bancorp |
10.9 |
1.82 |
|
Morgan Stanley |
10.6 |
0.72 |
|
Wells Fargo & Company |
9.5 |
1.26 |
|
PNC Financial Services |
9.3 |
0.91 |
|
Citigroup |
9 |
0.67 |
|
JPMorgan Chase |
8.9 |
0.93 |
Source: Capital IQ.
On banks, investors need to be especially mindful of the flip side of the earnings growth coin: risk and opacity. Another report, from the European Banking Authority (the European Union's "supervisor of national supervisors"), found that half the variation in banks' risk-weighted assets could not be explained by objective factors such as different asset portfolios or national regulatory differences. That's important, because risk-weighted assets are the denominator in calculating banks' capital ratios -- if they're understated, a bank will appear better-capitalized (i.e., safer) than it really is.
