Filed Under: ,
Tickers in this Article: JPM, BAC, USB, C
When it comes to investing in bank stocks, a general rule of thumb is to buy when trading falls below book value and to sell when trading exceeds two times book value. Unfortunately, the current uncertainty within the credit market has made the process of determining book value an exercise in fuzzy math. The plummeting value in mortgage assets and doubtfulness surrounding commercial loans are adversely affecting bank balance sheets these days. (The P/B ratio can be an easy way to determine a company's value, but it isn't magic! Learn more at Value By The Book.)

On the plus side, stock market volatility has created plenty of opportunities for investors to pick up banking stocks well below book value, with the latest economic downturn being a prime example. Currently, JPMorgan Chase (NYSE:JPM) trades at under 70% of the $36.15 in book value per share that it reported in its fourth quarter results on January 15. However, the bank's reported book value figures need to be taken with a grain of salt, as management conceded to a possible continuation of write-downs of mortgage assets and "additional reserving action" in business units such as credit cards, which saw the net charge-off rate rise to 5.56% during the fourth quarter. Investment banking results remained challenging as well, as fourth quarter net income came in at negative $2.4 billion on falling revenue and provisions for credit losses.

A Murky Quarter
JPMorgan Chase reported substantial growth in retail banking operations due to the acquisition of Washington Mutual, which pushed total deposits ahead 63% to about $340 billion. In addition, the number of banking branches grew to 5,474 locations.
Meanwhile, a hefty provision for credit losses totaling $3.6 billion took a huge bite out of the bottom line, but the division still managed to report positive net income of $624 million. Running through the other primary business units, asset management was a rare, but relative bright spot, as revenue declined 31% to $1.7 billion. Profits held up and came in at $255 million, but this number runs in stark contrast to last year's fourth quarter profits of $527 million.

For the full year, total net revenue dropped 6% to $67.3 billion, while net income declined 64% to $5.6 billion. JPMorgan Chase's bottom line figure fell 69% to $1.37 per share, which did not cover cash dividends declared at $1.52 per share.
Management expects to generate sufficient capital to cover the company's dividend payout going forward, but uncertainty remains regarding this guidance. According to the bank's management, "continued lower earnings is a reasonable expectation."
(Learn how to make sense of financial reports in our Financial Statements Tutorial.)

Bottom Line
Uncertainty over short-term trends is a key reason that share prices of JPMorgan and arch rivals Bank of America (NYSE:BAC), US Bancorp (NYSE:USB) and Citigroup (NYSE:C) remain volatile. Only US Bancorp remains firmly above book value, while Bank of America and Citigroup currently trade below 30% of book value. Again, uncertainty is high. But returning to the investing rule of thumb, buying stocks in money center banks below book value could yield big profits when conditions improve.

comments powered by Disqus

Trading Center