The big four investment banks reported first quarter results. We'll take a look at the revenue, sales-based valuation and the service sector of the economy to make an investment recommendation.
Net sales year-over-year for the big four banks declined. This is at least the second consecutive quarter where year-over-year revenue declined. Revenue declined in the fourth quarter and the first quarter compared to the year-ago quarters. Combined revenue has been between roughly $69 billion and $84 billion. First quarter revenue was reported at roughly $79 billion.
In the fourth quarter of 2011, Bank of America (NYSE:BAC) was the largest bank by revenue, with 36% of revenue, while Goldman Sachs had 8.6% of revenue.
Q1 of 2011 saw Bank of America control the largest share of revenue, while JPMorgan was a close second.
In Q1 of 2012, JPMorgan was the largest bank by share of revenue with Citigroup (NYSE:C) and Bank of America controlling 24.5% and 28.4%, respectively.
Between Q4 2010 and Q1 2012, JPMorgan and Citigroup's revenue was the most stable, while Goldman Sachs had the least stable revenue.
The big four investment banks have been increasing in share price while net sales per share has declined. Price-to-Sales, a key valuation metric, has increased substantially, without the investment banks bringing in more money through the doors. The fundamentals and share prices are diverging, meaning shares prices will fall unless the fundamentals improve.
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The service sector improved in recent months, while the latest reading showed signs of weakness. A decline in non-manufacturing PMI is expected in the coming months.
Financials typically lead the business cycle. The service sector has improved in recent months. While the service sector has improved, bank revenue declined as share prices increased; the price-to-sales ratio has increased. The banks are nearing a peak in valuation and investors should be positioning themselves short JPMorgan, Goldman Sachs, Citigroup and Bank of America.