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Did you ever ask yourself why prominent American banks are priced with substantial discounts below their book value? This article explains the answer. Brand Finance, a London based marketing research company recently published the global-brand evaluations. Using an objective index, based on discounted earnings model, the company estimated the brand value of all major banks in the USA. Financial institutions also evaluate their brand values, and report it as an asset under the “goodwill” section in the balance sheets. Based on banks’ own evaluations, and Brand Finance’s objective estimations, one can determine America’s most inflated balance sheets (in $ billions):

Company

Ticker

Brand Value

Goodwill

Difference

Intangibles

Inflation

Level

Bank of America

BAC

$34.25

$73.86

$39.61

$25.10

115%

JP Morgan

JPM

$32.39

$48.85

$16.46

$15.69

51%

Bank of NY

BK

$4.15

$18.04

$13.88

$5.69

334%

BlackRock

BLK

$2.59

$12.80

$10.21

$17.51

394%

Capital One

COF

$3.58

$13.59

$10.01

$0.73

279%

Citi

C

$17.13

$26.15

$9.02

$12.06

52%

VISA

V

$6.55

$11.45

$4.89

$11.48

75%

U.S. Bank

USB

$5.42

$8.95

$3.54

$3.21

65%

SunTrust

STI

$2.82

$6.32

$3.50

$1.571

124%

PNC

PNC

$4.99

$8.15

$3.16

$2.60

63%

BB&T

BBT

$3.07

$6.01

$2.94

$1.34

96%

State Street

STT

$3.41

$5.60

$2.19

$2.59

64%

Fifth Third

FITB

$1.75

$2.42

$0.66

$0.88

38%

The inflation Level is calculated as the difference between goodwill and brand value divided by brand value:

Inflation Level = (Goodwill - Brand Value) / Brand Value.

In business accounting, there are two types of intangibles: First are the legal intangibles such as patents, copyrights, and trademarks. It is acceptable for an innovative pharmaceutical (Merck (NYSE:MRK)) or high-tech company (NYSE:IBM) to have high-valued legal intangibles. The second type of intangibles are related to the unique, competitive advantage of the company. It would be reasonable for a monopolistic company (AT&T (NYSE:T)) to highly value its market position. However, none of the banks above are unique. There is almost perfect competition in the banking industry, where ATMs and branches are next to each other. One can easily close the Bank of New York Mellon account, and transfer all assets to a nearby Chase or Citibank branch.

Bank of America has the most extravagant balance sheet, followed by JP Morgan, and Bank of New York. Bank of America has inflated its balance sheet with $73.86 billion dollars worth of goodwill. The difference between the objectively estimated brand value and inflated balance sheet is obvious. That might be one reason why Warren Buffett dumped Bank of America shares.

From the balance sheets, one can also extract the intangibles. The numbers show that balance sheets are not only inflated in terms of goodwill, but also intangibles. Besides the already inflated goodwill estimations, Blackrock, Citi and Visa report intangible assets worth $17.51 billion, $12.06 billion, and $11.48 billion, respectively. I do not think it makes any sense for banks to have billions of dollars worth of intangibles.

Not all banks inflated their balance sheets with goodwill and other intangibles. This is the list of companies with conservative goodwill estimates:

Company

Ticker

Brand Value

Goodwill

Difference

Intangibles

Morgan Stanley

MS

$6.86

$6.74

-$0.12

$4.67

Schwab

SCHW

$2.05

$0.63

-$1.41

$0.54

KKR

KKR

$1.83

$0

-$1.83

$0

Ameriprise

AMP

$2.28

$0

-$2.28

$0.33

MasterCard

MA

$3.93

$0.68

-$3.25

$0.53

Wells Fargo

WFC

$28.95

$24.77

-$4.17

$15.88

Goldman Sachs

GS

$13.40

$3.49

-$9.91

$2.03

American Express

AXP

$15.53

$2.64

-$12.89

$0.97

Wells Fargo, a company that did not need a bailout, has a brand value equal to that of Bank of America, and JPMorgan Chase. It is quite intriguing to see that Wells Fargo’s accounting numbers are stated below fair value. Wells Fargo’s finance department estimates a reasonable goodwill of $24.77 billion. American Express, Goldman Sachs, Schwab, and Morgan Stanley are other financial institutions using conservative accounting practices. According to the latest balance sheets, KKR and Ameriprise did not report any goodwill either.

The inflated balance sheets of US banks show us that self-reported numbers are not reliable. Therefore, it is a good idea to throughly check the financial statements before making any investment decisions.

Source: America's Most Inflated Balance Sheets Belong to Banks