NEW YORK (Reuters Breakingviews) - America's big banks are laying out their base-case to Washington, D.C. Bank of America, JPMorgan and Wells Fargo all generated enough profit to beat estimates in the fourth quarter. Even so, none performed near well enough to justify stock gains since the U.S. election last November.
Shares in Bank of America, for example, have increased 36 percent since the day before polls opened – more than any of its peers. That leaves it trading just a touch under book value, which suggests it should be able to at least cover its cost of equity, which is generally pegged at 10 percent for such hulking financial institutions.
Despite solid gains in most businesses last year and more progress on cutting costs, however, the bank run by Brian Moynihan only eked out an annualized return on equity of 7 percent with its $4.7 billion of net income. The $600 million of additional interest income BofA reckons it can earn in the next three months thanks to rate increases only would add, after tax, around half a percentage point to its return.
JPMorgan's $6.7 billion of profit, also reported on Friday, breezed past Wall Street expectations. At an annualized 11 percent, it also beat its cost of equity, but needed help from a $475 million tax benefit and a $272 million accounting gain on credit adjustments. It also opted to set aside just 20 percent of revenue to cover investment-banking compensation, compared to 26 percent a year ago. Factor all that in and Chief Executive Jamie Dimon presided over a 9.3 percent return on equity. It is trading at 1.4 times book value, however, implying more like 13.5 percent.
Wells Fargo, meanwhile, now commands almost 1.6 times book value in the market. Yet its $5.3 billion of net income was lower than in fourth quarter 2015 and its annualized return of 10.96 percent dipped just below the 11 percent floor management set as an annual target last spring.
Behind much of the bank-stock increases, of course, is the widespread anticipation that President-elect Donald Trump's administration and Republican legislators will cut corporate tax rates and relax some of the rules introduced since the financial crisis. It's not clear yet, though, whether politicians will be any more reliable than traders.
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.