IInvestors fear the economic impact of the coronavirus will increase loan losses for big banks at the same time as lower rates squeeze net interest margins. As a result, four of the six largest US banks are trading below book value.
Investors fear that the economic impact of the coronavirus will increase loan losses at the same time as lower rates squeeze net interest margins.
Most of the largest US banks are now trading below their tangible book value following the strong sell-off in the sector.
Of the six major banks, only industry leaders JPMorgan Chase (JPM) and Bank of America (BAC) trade above tangible book, which is a concrete measure of equity that excludes goodwill and other intangible assets. The tangible book has often been a floor under bank stocks.
Investors are concerned, however, that the economic impact of the coronavirus could increase loan losses at the same time as lower rates squeeze net interest margins. The falling stock market is also dampening merger activity, the IPO market and bond financing. The uncertain impact of these factors weighs heavily on the group.
Citigroup (C), Wells Fargo (WFC), Goldman Sachs Group (GS) and Morgan Stanley (MS) are all trading below their end-2019 tangible book values.
Citigroup, whose shares were down 10% at $45.74 on Thursday, has the lowest valuation at about 65% of its tangible book value of about $70 a share.
Morgan Stanley and Goldman Sachs both trade around 80% of tangible book value. Morgan Stanley, whose shares fell nearly 10% to $33.28 on Thursday, had a tangible book value of $40 per share on Dec. 31. It expects a drop of around 10% in its tangible book following its planned merger with E*Trade Financial (EFTC) but even taking this reduction into account, the shares are trading below the tangible book.
Goldman Sachs Group (GS), whose shares were down 6.6% at $160.62, had a tangible book value of around $205 per share at the end of 2019. Its shares topped $240 in January at the time of its investor dDay.
Wells Fargo, which a decade ago had the highest valuation in the group, now trades at 90% of its book value. Its shares fell 8.7% to $29.50, below the tangible book of about $33.50 per share.
JPMorgan orders 1.5 times the tangible pound and Bank of America trades for 1.1 times the tangible pound. JPMorgan shares fell 4.7% to $91.50 against a tangible book value of about $61 per share. Bank of America fell 5.7% to $21.38, above its tangible book value of about $19.40 per share at the end of 2019.
Most banks have generated low to medium returns on tangible book value, which argues for higher stock prices. But investors take little comfort from these historic returns in the current environment.
Write to Andrew Bary at [email protected]
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