How US Banks Look after the Market Rout in Early February



Banking stocks mixed

Most commercial banking stocks (XLF) have given positive returns over the past one-month period despite the decline in broad markets. Citigroup (C) and Wells Fargo (WFC) have only netted negative returns over the past one month. 

Goldman Sachs (GS) has seen the biggest spike of 4.3%, primarily due to expectations of increased trading revenues and active fund management.

On the valuation front, JPMorgan (JPM) and Wells Fargo command price-to-book multiples above 1.6x. Bank of America (BAC) and Goldman Sachs are trading in the range of 1.3x–1.4x.

Among the major banks, Citigroup (C) has the lowest valuation multiple of 1.1x. However, the bank is expecting strong operating performance growth in 1H18, which would be helped by higher net interest income, investment banking, and private banking growth.

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Risk management policies

After the 2007–2008 financial crisis, investors tend to give premiums to financial institutions that have strong risk management policies and a lower level of delinquencies. 

JPMorgan Chase (JPM) has commanded premium valuations due to similar policies, strong asset quality, and diversified operations. Wells Fargo (WFC) has commanded a premium due to improved asset quality and higher net interest margins (or NIMs).

In terms of valuations, one of the biggest beneficiary in recent years is Bank of America (BAC). The bank’s valuations have spiked from less than 1.0x on a price-to-book basis to 1.4x in recent months. This trend is due to its improved performance on multiple fronts—including trading, investment banking, and asset management—apart from core banking operations.

Global reach, higher credit offtake, and new inflows for asset management activity are expected to be key drivers for US banks in 2018. The current valuation seem fair when compared to the historical averages. 


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