Last week brought earnings reports from the big four money-center banking giants. What is so interesting about the industry is that the banks are more or less beyond the restrictions of the capital plans, with Bank of America Corp. (NYSE: BAC) being the current exception. Even Citigroup Inc. (NYSE: C) can have dividends and common stock buybacks now, and it is expected that Bank of America’s capital allocation review will allow the bank to return more capital to shareholders.

This brings up an interesting point, which is that JPMorgan Chase & Co. (NYSE: JPM) and Wells Fargo & Co. (NYSE: WFC) have been trading at premiums to their book values — and a hefty premium at that in the case of Wells Fargo.

24/7 Wall St. cannot help but wonder if investors are finally ready to place a premium on book value in Bank of America and in Citigroup now that the bottom in the market was more than six years ago. We have created a montage of the earnings results, dividend yields, discount or premium to book value (tangible or stated) and other color on each of these major banks.

Bank of America

Bank of America reported second-quarter results, helped by lower costs, with earnings per share (EPS) of $0.45 on revenue of $22.35 billion. Results a year ago were $0.19 EPS on revenue of $21.96 billion, and results for this past quarter compared to the Thomson Reuters consensus estimates for EPS of $0.36 on $21.32 billion in revenue.

Its shares closed at $18.10 last week, up over $1 from last Monday. Bank of America’s stated book value was $21.91 per share and the tangible book value was $15.02 per share. The bank’s consensus analyst price target is now $18.72 and its dividend yield is about 1.2%. Because of a key analyst upgrade that went well above the consensus price target, much more detail on Bank of America is featured on the second page.

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Citigroup

Second-quarter earnings came in at $1.51 in EPS on $19.5 billion in revenue, versus consensus estimates of $1.34 in EPS on $19.11 billion in revenue. Citigroup deposits were $908 billion as of the end of the quarter, down 6% from the same period of last year. At the same time, loans totaled $632 billion, down 5%, and loan losses were $14.1 billion, or 2.25% of total loans.

Citi’s book value per share was $68.27 for the second quarter, and tangible book value per share was $59.18, representing 2% and 4% increases respectively. This past week the post-earnings value was at a 15% or so discount to book value. The bank repurchased about 28 million common shares and returned a total of $1.7 billion to common shareholders in the form of share repurchases and common stock dividends. Its yield is still a paltry 0.4%. At $58.75, even after more than a $3 gain this week, Citi just trades at a steep discount to the stated book value. RBC even raised its price target to $65 from $62 in its call.

JPMorgan

JPMorgan’s second-quarter results were $1.54 EPS on revenue of $24.53 billion, versus the consensus estimates for EPS of $1.44 on $24.49 billion in revenue. In the same period a year ago, it reported EPS of $1.46 on revenue of $25.38 billion. The gains were shown to be from lower costs and legal expenses.

JPMorgan has a dividend yield of 2.7% and is finally past its London Whale issues. At $69.21, shares have a 52-week trading range of $54.26 to $69.95 and a consensus analyst price target of $73.32. Still, its share price compares to a tangible book value per share of $46.13 (up 7% from a year earlier).

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Wells Fargo

The earnings report from Wells Fargo seemed on the surface to be dominated by lending losses. Its fiscal second-quarter results were $1.03 EPS on revenue of $21.3 billion, more or less in-line with consensus estimates of $1.03 EPS and $21.7 billion in revenue. In the same period a year ago, Wells Fargo reported EPS of $1.01 on revenue of $21.1 billion. Total loans rose $27.2 billion sequentially to $888.5 billion in the quarter, and total average loans were up by up $7.2 billion to $870.4 billion.

Wells Fargo has a dividend yield of 2.7%. Shares ended the week at $69.21, in a 52-week range of $54.26 to $69.95. The consensus analyst price target is $73.32. Wells Fargo now trades at well over 200% of book value of $32.96 and that book value was $32.70 in the quarter before. Still, Wells Fargo is by far the most dominant position of Berkshire Hathaway under Warren Buffett’s top stock holdings.
So, the biggest post earnings call we saw in the four banks was in Bank of America’s stock. The independent research firm Argus raised Bank of America to a Buy from Hold and assigned a $20 price target.

The firm said that after earnings the bank’s franchise has hit an inflection point after more than doubling EPS from the prior year. Adjusted EPS of $0.38 beat the $0.36 consensus forecast and also beat the Argus estimate of $0.32 EPS.

Argus maintained that Bank of America’s results were impressive on several fronts, particularly after having missed its consensus estimates in three of the past four quarters. The report said:

If BofA continues to make progress on cost initiatives and takes advantage of recent franchise investments, we believe the potential earnings upside is greater than at other large banks that are already operating more efficiently. … At 12-times our 2015 EPS estimate and 1.2-times tangible book value, BofA appears attractively valued relative to other large-cap banks.

Argus further noted:

Given that the current dividend yield is well below the peer average (due to the Fed’s need for a greater capital buffer), we believe that more flexibility on capital returns will also boost investor interest in the stock. … The company has made substantial progress in reducing legacy-related mortgage costs and high litigation costs. It is also positioned to deliver higher net interest income once rates start to move higher. If BofA continues to make progress on cost initiatives and takes advantage of recent franchise investments, we believe the potential earnings upside is greater than at other large banks that are already operating more efficiently.

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The bank’s valuation model was shown as follows in the Argus report:

Although the shares have recently risen from $15 to $17, we believe that the 2Q earnings report, the winddown of legacy asset issues and legal expenses, and new investment in the business, could lead more investors to recognize the company’s underlying earnings power. Assuming that BofA continues to make progress on cost initiatives and takes advantage of recent franchise investments, we believe the potential earnings upside is greater than at other large banks that are already operating more efficiently. … We note that the shares have traded as high as $54 in the precrisis era, when earnings were at their peak.

24/7 Wall St. wanted to also see how each of the banks has performed as a stock on a total return basis. Year-to-date (YTD) share performance and performance over the past year (YY) of the four money-center banks has been as follows:

• Bank of America up only 1.8% YTD, up 20.5% YY
• Citigroup up 8.7% YTD, up 19.6% YY
• JPMorgan up 12.8% YTD, up 22.8% YY
• Wells Fargo up 7.1% YTD, up 17.4% YY

Maybe book value may start to matter again to long-term investors. Wells Fargo has the fewest problems of the money center banks under Dodd-Frank, but it trades at a serious premium to book value. JPMorgan trades at a premium to its book value, but its premium would likely be higher had it not run into the London Whale and other regulatory hurdles in recent years. Citigroup and Bank of America both trade at discounts to book value, with Citi valued under its stated book value and to its tangible book value.

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