Bank stocks have been hit hard this year, creating an opportunity for shrewd investors to step in and pick them up for steep discounts relative to their 2015 highs. Four of the nation's biggest banks, in particular, are trading well below their respective tangible book values: Citigroup (NYSE:C), Morgan Stanley (NYSE:MS), Bank of America (NYSE:BAC), and Goldman Sachs (NYSE:GS).

While stocks are generally valued relative to their earnings, via the price-to-earnings ratio, the most popular metric to assess bank stocks is the price-to-tangible-book-value ratio. As the name implies, this compares a bank's stock price to its tangible book value per share.

In Bank of America's case, its tangible book value per share on December 31, 2015, which is the latest figure available, was $15.62. Meanwhile, its shares currently trade for $13.14. Its price-to-tangible-book-value ratio is thus 0.84. The market believes, in other words, that Bank of America is worth less than the bank's own balance sheet claims. And the same is true for Citigroup, Morgan Stanley, and Goldman Sachs.


Price to Tangible Book Value

Return on Equity (TTM)




Morgan Stanley



Bank of America



Goldman Sachs



Data source:

There are two possible explanations for this. The first is that investors think that these banks, and Bank of America and Citigroup specifically, are sitting on large loan losses. It's widely assumed, for instance, that sharply lower oil prices will soon cause energy companies to default en masse on their bank obligations. This was a major topic of conversation on fourth-quarter earnings calls two months ago.

The second explanation is that these companies will create less value for shareholders over the foreseeable future because their earnings are under siege. Just this week, Citigroup's chief financial officer said that the bank's trading revenues could drop 15% in the first quarter. "That would make 2016 the fourth straight year that the company's revenues from those operations have declined in what is typically the industry's strongest quarter," noted Bloomberg's Dakin Campbell.

This will negatively impact all of these banks, as Goldman Sachs, Morgan Stanley, Citigroup, and Bank of America all generate revenue from trading.

Banks are also facing ever-increasing regulatory scrutiny. This is driving up compliance costs and clamping down on revenue streams. It's widely assumed, for example, that the Consumer Financial Protection Bureau will issue rules on overdraft fees this year, which could cost Bank of America hundreds of millions, if not a billion, dollars in forgone annual revenue.

On top of this, all four of these banks are subject to particularly strict capital requirements. Because they're classified as global systematically important banks, they must hold more capital than, say, their regional banking counterparts. Citigroup's "G-SIB buffer" is 3.5%, while Goldman Sachs, Morgan Stanley, and Bank of America's are all at 3%. Because this reduces the leverage these banks can use, it necessarily weighs on their profitability.

All that said, there's a point at which even the most challenged stocks have gotten too cheap. And I believe that's the case here. Despite its problems, which I've discussed at length in the past, Bank of America seems like an especially good value right now. Goldman Sachs does, too. This is why I recently bought shares of both. I'm less sanguine about Citigroup and Morgan Stanley, but even those seem poised for an eventual rebound, as their shares simply won't trade for such steep discounts to their tangible book values forever.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.