Comparing Current Bank Valutions to Peak and Trough Levels

Includes: BBT, C, GS, JPM, MS, PNC, STI, USB, WFC, XLF
by: Parsimony Investment Research

The Financials Select Sector SPDR (NYSEARCA:XLF) has underperformed the broader market (NYSEARCA:SPY) by 15% over the last 52 weeks. We think the market is telling us something about the near to medium term earnings growth prospects of the large U.S. banks.

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Despite a steep yield curve and increased capital ratios improvement in valuation, we remain cautious on the large banks due to:
  • (i) the continued softness in the U.S. economic recovery and real estate markets;
  • (ii) increased regulatory environment hindering earnings growth; and
  • (iii) continued deleveraging cycle from creditworthy borrowers.
The table below outlines the current book values of the large U.S. banks in the S&P 500. For comparison purposes we included book value figures from the crisis lows in March 2009 as well as the market peak in October 2007. For the group, book values remain approximately 60% off the peak as well as approximately 60% off the lows.

Note: This does not indicate book value lows / highs, but rather the book value at the time of the market trough and peak.

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We think that an investment in the banks at this stage of the cycle is dead money. Book values have increased significantly from trough levels, yet bank balance sheets have not shown a meaningful improvement in asset quality (i.e., most banks are still struggling with legacy investments made at the peak of the crisis).

Below is a ranking of the banks based on the percentage increase in book value since the trough of the market (from largest increase to smallest increase):

  • Citigroup +355%
  • SunTrust Banks +211%
  • Bank of America +137%
  • JP Morgan Chase +95%
  • Morgan Stanley +65%
  • BB&T Corp +65%
  • PNC Financial +35%
  • Goldman Sachs+33%
  • U.S. Bancorp +22%
  • Wells Fargo +21%

As we highlighted in recent posts, we recommend selling bearish call spreads on the banks as an income play over the next 6-12 months.

Disclosure: I am short BBT, STI, PNC through bearish call spreads.