April 16, 2018 / 11:48 AM / a year ago

Breakingviews - BofA highlights bank shareholders’ luxury problem

Bank of America Chief Executive Brian Moynihan smiles during an interview in Hong Kong March 8, 2013. REUTERS/Bobby Yip

NEW YORK (Reuters Breakingviews) - Shareholders have a new problem with U.S. bank stocks - but at least now it’s a luxury one. Bank of America on Monday revealed that it earned $6.9 billion in the first quarter of the year. That beat estimates, and like rival JPMorgan it was the best showing from the core business in years. Yet big banks’ shares have flatlined of late. That’s because they already reflect improved margins.

BofA, run by Brian Moynihan, is a case in point. The mega-lender’s shares have barely budged so far this year. But they have surged 75 percent since Donald Trump won the U.S. presidential election 17 months ago, making BofA the best performer in its peer group. It stands to gain more than rivals from rising interest rates, according to quarterly regulatory filings, as well as getting a boost from December’s tax cuts.

As a result, the bank with more than $2.3 trillion of assets now trades at a premium of 25 percent to book value. That’s healthy for a company which in the first three months of the year managed an annualized 10.8 percent return on equity – only just enough to cover its cost of equity. JPMorgan, meanwhile, sports an even healthier valuation, at 1.65 times book value, after cranking out a 15 percent annualized ROE last quarter.

In these cases and others, a premium to net asset value suggests investors are anticipating growth. That’s despite some concerns. Several lenders’ earnings have been muddied by one-off gains and losses. Strip them out and both Wells Fargo and JPMorgan fell short of estimates for the past quarter, for example. There’s still uncertainty about the new tax code, too. Citigroup and JPMorgan each handed over more to Uncle Sam than investors expected.

By and large, though, shareholders have priced in the benefits to banks’ bottom lines from the improving economy, the Federal Reserve and tax cuts. The next leg up relies on the top of the ledger. Revenue at BofA is expected to grow by only 12.5 percent between the end of 2017 and 2020, according to Thomson Reuters data. JPMorgan could manage 15 percent, with Wells Fargo struggling at just shy of 7 percent.

That’s not bad, but it’s already accounted for. For now, bank stocks look as good as they can get.


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.

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