Money Center Banks Poised To Return To Spot Light
Adnan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
JPMorgan, Goldman Sachs and Morgan Stanley are among the US money center banks that are poised to return to the spot light. Investors stayed away from these banks in 2011, while their 2012 performance was not impressive either. In 2011, Goldman Sachs and Morgan Stanley fell 46% and 44%, respectively. However, a rise in the levels of activity in debt and equity trading coupled with the highest mergers and acquisitions since 2008 are expected to bring improvement in the results of banks with significant capital market operations when they report this week. Analysts at Morgan Stanley estimate a 44% surge in revenues from trading and investment banking. Therefore, both investors and analysts see more value in large banks than in regional ones focused on lending.
The last three months saw a significant surge in M&A activity as $730 billion worth of merger announcements were made by a variety of companies. Similarly, average daily trading of high-yielding bonds jumped 45% from a year ago, while global equity trading edged up 6% compared to the linked quarter.
Focus on Expense Management
Despite the improved activity in debt and equity trading, I believe compressed interest spreads will require banks to focus on expense management. This is why Morgan Stanley is expected to cut 166 jobs from its investment bank and support staff, while Citigroup (NYSE: C) will eliminate 11,000 positions overall. Bank of America is focusing on reducing annual costs by $8 billion, including a major cost reduction in its investment banking, trading and wealth management wings. Wells Fargo reported its fourth quarter performance with rather disappointing expense management figures leading the efficiency ratio to fall.
Earnings Estimates
According to the estimates of 26 analysts covering Goldman Sachs (NYSE: GS), the bank is estimated to post an EPS of $3.66 when it reports its fourth quarter performance. This is about double the EPS from a year ago. Looking at the improvement in trading activity, most of the analysts covering the stock had increased their forecasts in the past one month. Similarly, Morgan Stanley (NYSE: MS) is expected to report an EPS of $0.40. Excluding the effects of debt value adjustments, the estimated EPS will be the highest in over a year.
Going forward, trading and advisory revenues in 2013 are expected to surge by more than 10% and 25%, respectively.
Relative Valuations
Most of the US money center banks are trading below 1.25 tangible book value multiples. JPMorgan (NYSE: JPM) is trading at 1.23 times its third quarter tangible book value compared to 0.79 times for Bank of America, 0.81 times for Citigroup, 0.94 times for Goldman Sachs and 0.77 times for Morgan Stanley. This makes the Wall Street banks more attractive in value than the regional lenders.
Conclusion
I recommend investors buy large cap US banks instead of their regional counter parts. I believe the large cap banks have attractive valuations and the Fed’s bond purchases will encourage trading, while it will hurt lending spreads of the regional banks.
equityfinancials has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs. The Motley Fool owns shares of Citigroup Inc and JPMorgan Chase & Co.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!
