Banks Have Their Eyes Set on the Future

Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Bank results are a good proxy of what might be happening in the economy. Signs of an economy that is improving such as more M&A deals, more loans and fewer defaults are also the drivers of much better top and bottom line results at banking institutions. Here I will analyze the last earning results of three key U.S. banks and set some insights about the future.

Steady rise back to the top

The overall picture emerging from Citi's (NYSE: C) current earnings report is one of margin stability and bottom-line profitability. The key revenue and expense lines were all close to expectations (EPS came at $1.34, beating the street's $1.18 estimate). Tangible book value grew and credit trends continued to improve in the U.S. and were stable in emerging markets, where Citi makes 43% of its revenues and 49% of its earnings.
The wind-down of Citi-holdings continues at a steady pace with a $16 billion decline in assets to $131 billion, or 7% of total assets. Management implied that they expect current reserves to cover most of the losses in the mortgage book and non performing loans to continue their decline at ever faster rates. Citi is one of my favorite large capitalization banks. With a dividend ready to rise from the currently negligible levels and accumulating capital fast (the bank's Bassel 3 tier one common ratio is at 10%), I think Citi is a good long for any large portfolio. The bank trades at 97% tangible book value and 11 times P/E.

The king of Wall Street is coming back

Goldman Sachs (NYSE: GS) is indeed coming back to the best of its practices, generating great returns. The bank reported second quarter EPS of $3.70, well ahead of expectations ($2.87). This quarter's up-side was largely top-line driven by Investing & Lending and Investment Banking results. Strong top line, which came up by 30% year-over-year, was not the only reason for Goldman's out-performance. Exceptional expense and capital management was also a major factor. Going forward, I see core capital (Tier 1 common ratio increased to 13.5%) to continue rising from the current levels without affecting profitability ratios.

Following a quarter of strong buy-back activity (the bank bought 10.5 million shares) and a growing dividend (Goldman pays a 1.23% cash dividend yield), I think Goldman should be at any large capitalization banking portfolio. The bank has a unique investment banking franchise and solid balance sheet. Goldman trades at 1.1 times tangible book value and 11.5 times P/E.

This Wall Street whale continues to be a great bank

With a 2.8% cash dividend yield and trading at 1.4 times tangible book value per share and 8.5 times P/E, I think JP Morgan (NYSE: JPM) is a good combination of quality and fair valuation. Once again, JP Morgan surprised the market favorably with its EPS coming at $1.60 versus street's consensus of $1.44. Those better than expected earning figures were a result of the Investment Banking division and better credit quality and reserve release.
That said, expenses (at $450 million) came as the one single relevant disappointment since they were materially higher than the market expected. Nevertheless, the bank clearly is a long term out-performer. In spite of headwinds (such as the London Whale), doubts and regulatory harassment, JP Morgan still remains the world's premier global bank in terms of capital strength and, with Returns On Tangible Equity at 16% also leads most of its peers on profitability.

Foolish bottom line

As I said at the beginning of the article, U.S. banking results are tightly tied to the country's economic performance. When the economy expands and jobs are created, banks make more money. I think we are starting to see the next phase of a journey that started at the burst of the real estate bubble back in 2008. Apparently, its about time to be long banks!   

Many investors are terrified about investing in big banking stocks after the crash, but the sector has one notable stand-out. In a sea of mismanaged and dangerous peers, it rises above as "The Only Big Bank Built to Last." You can uncover the top pick that Warren Buffett loves in The Motley Fool's new report. It's free, so click here to access it now.

Federico Zaldua 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!

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