Shares in America’s banks are booming again, with Goldman Sachs
Group Inc., J.P. Morgan
Chase & Co. and Bank of America
Corp. hitting fresh trading milestones Tuesday that seemed unreachable during the crucible of the financial crisis.
Investor expectations of higher interest rates, lower taxes, lighter regulation and faster economic growth under the Trump administration have added $280 billion in combined market value to the nation’s six largest banks since Nov. 8.
On Tuesday, shares of Goldman hit a record high, passing a bar first set in 2007 before the financial crisis. J.P. Morgan
also hit an all-time closing high.
Meanwhile, Bank of America
traded in line with its net worth—or the difference between its assets and liabilities—for the first time since late 2008. The bank had been trading as low as 15% of this level in March 2009.
Bank stocks overall have outperformed broader stock markets
since the election. The roughly 27% gain since Nov. 8 for the KBW Nasdaq Bank Index is around three times that of the S&P 500. Markets
rose further Tuesday; the Dow Jones Industrial Average climbed 92.25 points, or 0.45%, to close at 20504.41.
One reason for such investor optimism: After years of hacking away at expenses—shedding businesses, cutting staff and investing in technology that can be ramped up and down cheaply—expenses are near all-time lows across Wall Street. That means that if revenue does grow as many investors expect, the payoff could be especially big.
Essentially, all the belt-tightening at banks means each extra dollar of revenue should be more profitable than the last. “They’ve come out of this thing lean and mean,” said Ed Wachenheim of Greenhaven Associates, a $6 billion investment firm that counts Goldman, Citigroup Inc. and J.P. Morgan
as its three biggest holdings. Once revenue starts increasing, “there’s a ton of upside,” he said.
Hopes for such positive “operating leverage”—when revenue grows at a faster pace than expenses—were in evidence during the bank-earnings season that wrapped up last month. The phrase was mentioned 11 times on Bank of America’s call with analysts, nine times on Goldman’s and six times on Citigroup’s.
Indeed, expenses at the six biggest U.S. banks in 2016 are down 13% from 2013, while revenue is roughly flat. Savings are coming from all corners of the financial firms.
Last year, the six biggest U.S. banks booked a combined 23 cents of every dollar of revenue as profit, up from 15 cents five years ago.
Employees at Morgan Stanley are taking a nickel less out of each revenue dollar than they did in 2010. Bank of America
cut the equivalent of 15 Empire State Buildings from its real-estate footprint over five years. J.P. Morgan
stopped paying for employees’ BlackBerrys.
At Goldman, noncompensation expenses are their lowest since 2007. “This represented a lot of work,” Goldman Chief Executive Lloyd Blankfein said at an industry conference last week. “We’ve taken a lot of costs out—not to hunker down, but to give ourselves a lot of operating leverage, frankly.”
Investors hope profits will gain even further if revenue growth materializes. Bank of America
shares, for instance, are up more than 41% since the election, the most of any big, U.S. bank.
That is partly a function of its focus on U.S. consumers and its large pool of rate-sensitive mortgage securities. These tie its fortunes more closely to potential increases in U.S. interest rates than many peers.
The share-price gains led Bank of America’s stock to trade at book value, or the firm’s intrinsic worth, for the first time since October 2008. The shares were valued below this level as the bank was sucked into the financial crisis and then as it struggled with legal fines, credit losses and lackluster returns since then.
Despite the stock’s higher valuation, the share price is still less than half of its precrisis peak of $54.90. And the bank’s return on equity, a closely watched measure of profitability, is still below the 10% level investors typically demand.
Citigroup is now the only one of the big, U.S. banks to trade at a discount to book value, at about 81% of this level, according to FactSet data. Even so, it, too, hit a milestone Tuesday: Stock options granted to executives in 2011 expired on Tuesday “in the money,” that is, exercisable at a gain, the first time that has happened since August 2007.
Goldman shares, meanwhile, closed at an all-time high of $249.46, beating by more than a dollar a share the previous record set on Halloween 2007. Shares are up 37% since the election.
Its fuel is different than Bank of America’s. Goldman, with few consumer-facing businesses and a smaller portfolio of loans, won’t get the same boost from higher interest rates.
Rather, investors are betting on Goldman’s once-mighty trading desk, which has been hurt by postcrisis regulations and quieter markets.
Volatility has returned, helped by diverging interest rates around the world, swings in stock-market sectors and the occasional presidential tweet.
President Donald Trump has promised to trim trading regulations that ban some lucrative trading activities and require banks to hold extra capital. A Goldman alumnus, Gary Cohn, is the face of the administration’s deregulation push.
But higher revenue at Goldman and its rivals still depends on factors that have yet to emerge. Mr. Trump has said he supports tax cuts and a rollback of the 2010 Dodd-Frank financial law but has offered few details. And most major changes require action in Congress, where Democrats may prove an obstacle.
“There’s a lot of stuff the administration has talked about doing, but there’s still many things they have to do,” said Jason Goldberg, an analyst at Barclays PLC.
Source: The Wall Street Journal