Bank Earnings are Fully Valued

"There is no reason whatever to fear a crash"


Charles Mackay

“The Madness of Crowds”

October 1845


The key question that faces us all is not about tax cuts, the Fed portfolio unwind, bitcoin or even developments in China, but rather how long the “inflation” of asset prices and related suppression of market volatility so generously provided by global central banks will last.  Earnings for most sectors are thus “fully valued,” especially for large cap financials.


This week begins the latest spectacle in the world of so-called “investing,” namely the results for the largest US banks.  Take out your red crayons and follow along.  The Street has convinced themselves that tax cuts will spur the repatriation of cash and this will somehow boost bank lending from the present doldrums.  No.  Only economists could think of such stupidity.  But we digress.


First on the hit parade of corporate under-performance is our old amigo Citigroup (C), a bank which is distinguished by the fact that it has the largest deferred tax assets of the large bank peer group.  Suffice to say that Citi will be flushing $20 billion or so due to the lower corporate tax rate as it marks down its enormous pile of deferred tax assets.  Capital will fall mid-single digit dollars. But will the Fed and OCC rein in Citi’s precious dividend?  Noooo.  Citi reports on Tuesday, January 16th.


It takes real skill to lose this much money. We’ve been following Citi since the bad old days of John Reed, Raulito and Citibank Private Banking, so there are no surprises at this stage of the game.  The lineal successor to CIA front BCCI, Citi is an international banking and money laundering franchise with offices in all the right places. A subprime credit card and consumer lending book is the whipped cream on the cake. The only real domestic peer Citi has in credit terms is CapitalOne Financial (COF) and that is a real put down to COF.  Offshore we have the folks at HSBC Holdings plc (HSBC) as another good credit comp for Citi.


Citi’s net loan and lease losses are 5x the large bank peers on the same levels of capital.  The Street has C revenue up small in Q4 and for the full year 2017.  Net income was $12 billion and change in Q3 so the current quarter is likely to be a loss in GAAP terms.  All of you optimists can look through the latest recurring “extraordinary” loss to see the value in this rancid zombie queen.  Big credit risk, negative risk-adjusted returns and a 1.7 beta.  Yummy.


Next we have Goldman Sachs (GS), which has decided to take a $5 billion hit due to offshore tax losses related to repatriation.  This is more than a little ironic since GS was the architect of some of the most offensive offshore tax shelter strategies in recent memory, including the fine piece of work that cost Dow Chemical millions when it was disallowed by the IRS.  See the comment on same in The Institutional Risk Analyst, “Tax Cuts, Offshore Cash & Jobs.”


The Street has GS revenue up about 5% in Q4, but earnings down small for the year-end.  Even though the stock is near the 52-week highs, GS still has a rather effusive following among Street analysts with no “sell” ratings, this despite the fact that the “big idea” of CEO Lloyd Blankfein is trading crypto currencies.  Since bitcoin and other “tokens” are gaming instruments rather than assets, it remains to be seen how GS will book these items on its balance sheet.  Q: Does the Volcker Rule cover gambling by banks as a “principal” activity? 


BTW, read Andrew Cockburn in Harpers, “Swap Meet: Wall Street’s war on the Volcker Rule,” on the banks’ desperate war to repeal the Volcker Rule and get back to the bad old days of front-running clients.  As per our conversation last year with Tall Paul, we are engaged in a full throated defense of the Volcker Rule, the only part of the 2010 Dodd-Frank law that does not enrich a progressive politician.


JPMorgan Chase (JPM) and Wells Fargo (WFC) will be leading things off on Friday.  The Street has JPM revenue up small for Q4 ’17 and the full year, but surging to 6% in Q1 ’18.  Like GS, JPM is near its 52-week high but does have a couple of analysts with “sell” ratings.  Loan growth is just half (3%) the rate of its large bank peers, but JPM is only half bank, while the rest is securities and derivatives trading, and of course, wealth management.  At almost 15x earnings and a beta of 1.3, it is s steal – really.


Despite the noise around WFC’s management, America’s largest mortgage bank is also at the 52 week high.  The Street has WFC delivering mid-single digit revenue growth in Q4 ’17, but then falling to about zip in Q1 ’18.  Most Street analysts have WFC somewhere between a “hold” and a “hold,” with no sell ratings.  Sales growth for 2018 is see just shy of 2%. Perhaps this is why WFC is sporting a 1 beta but still trades on a higher P/E than the House of Dimon.  Again, the operative description here is “fully valued.” 


Finally we come to Bank of America (BAC), which was the best performing large bank last year in terms of stock price, with a nose-bleed beta of 1.8.  Yeah, that’s right, BAC actually has a higher equity market volatility measure than Citi.  The Street estimates have revenue growth up almost 7% in Q4 ’17 and up 4% in 2018, by far the best performance of the group. 


BAC CEO Brian Moynihan thinks that the tax bill will “clearly” be good for the economy and banks, this even though the banking industry numbers for loan growth continue to sag.  BAC is a cost cutting story, not a loan volume play – especially given that its historical growth rate for loans & leases is in the bottom third of all large banks and just half of Street estimates.  Maybe a magic pookah will fly by Brian’s window and sprinkle some cosmic pixie dust to bring these disparate data points together??


The Street is fully invested in BAC and Mr. Moynihan with two thirds of analysts showing a “strong buy” or “buy” rating on the stock.  Of note, the Street has BAC’s revenue growth just shy of 6% for full year 2017 and then falling to half that amount in the current year.  Again, the large bank loan growth rate averaged almost 7% in Q3 ’17 while BAC was running at half that rate, according to the FFIEC.  But remember this is a growth story, but not about growth.  See you all on WEX at 5:30 ET Friday....