Citigroup’s Shares Edge Towards Book Value, Goldman Sees Decline In P/B Ratio

Upbeat investor sentiment has driven share prices across the U.S. banking industry at a faster rate than the overall stock market over recent quarters, but the rally has not been a smooth one for all of the largest U.S. banks. Goldman Sachs and Wells Fargo in particular have seen their shares underperform the sector, with company-specific events weighing on their share prices. This has resulted in the price-to-book (P/B) ratio for JPMorgan Chase exceeding Wells Fargo’s, while the figure for Morgan Stanley exceeding Goldman’s.

The table below captures the current P/B ratio for the seven largest U.S. banks. The book value shown is as reported by individual banks at the end of Q3 2017.

The P/B ratio compares the share price with the bank’s underlying financial condition (captured by the book value per share), and can indicate whether the shares are being priced too cautiously or too aggressively. Marked differences between the price of a company’s shares compared to its book value are often a sign of under- or over-valuation. At times, however, very low P/B ratios may actually be because of problems with the company’s business model, whereas high P/B ratios could be due to optimism about the future potential of a company’s business model.

The table above summarizes the change in P/B ratio for these banks over the last five quarters, with the color gradation along a row added to help understand the overall trend for a particular bank. Bank share prices were considerably depressed a year ago in the aftermath of an unexpected Brexit vote. But the prices have recovered considerably since then in view of a strong economic outlook.

However, the relatively weaker performance for Goldman Sachs and Wells Fargo stands out in the table above, as they have both slid one position in this list since the end of Q3. While Goldman’s share price has been hurt by its underwhelming debt trading performance in each of the last three quarters, Wells Fargo has drawn considerably flak from investors for the string of mis-selling frauds that have surfaced at the bank since last September.

That said, U.S. Bancorp’s shares continue to trade at around twice its book value – indicating that investors believe in its risk-averse business model as well as its potential to grow through acquisitions in the long run. At the other end of the spectrum, Citigroup’s share price has yet to recover to its book value nearly a decade after the economic downturn of 2008. The bank’s P/B ratio peaked at a post-recession high of nearly 97% in early October before pulling back to 94% now. However, we expect the bank’s continued focus on cutting costs while cleaning up its balance sheet of legacy and non-core operations, coupled with the overall strong economic conditions globally, to help the figure cross 100% early next year.

Interestingly, as a higher P/B ratio implies an elevated market price for the shares of a bank, the banks that are higher up on the list may be better off returning cash to investors in the form of dividends, while those with lower P/B ratios should ideally focus more on doing so through share repurchases (this of course can depend on company-specific factors as well). We believe that Goldman is likely to use the opportunity to boost its share repurchases in the near term. It should be noted, though, that the total payout for any bank is capped by the figure pre-approved by the Fed for the period from Q3 2017 – Q2 2018.

We represent dividend payouts and share repurchases in our analysis of Goldman Sachs in the form of an adjusted dividend payout rate, as shown in the chart below. You can understand how an increase in Goldman’s adjusted payout ratio affects its share value by making changes here.

See Trefis analysis for U.S. Bancorp | Wells Fargo | Goldman Sachs | JPMorgan | Morgan Stanley | Bank of America | Citigroup

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