Obfuscation And Legerdemain, Practiced By Jamie Dimon, Others
Lemme kick around JPMorgan JPM Chase, the world’s numero uno in banking. I expected Citigroup C to issue a quarterly report that’s incomprehensible, but Jamie Dimon gets the palm.
In a Covid-19 economic setting, there can be no talk about what’s normalized for banks. How project loan charge-offs and net interest margins? ¿Quién Sabe? Can underwriting revenues hang in and what about trading profits? Do they hold up?
Normally, in bank stock analysis, you compare quarterly results with year ago numbers as well as the previous quarter. You do this exercise for each profit center as to revenues, operating profit margins and loss charge-offs. Then, you come up with an earnings number for the next quarter and for succeeding 12 months. Ask what is normalized earnings power and dividend paying capacity. Finally, slap a price-earnings ratio on the bank in question and come up with a buy, hold or sell decision.
Consider book value as a weighted metric and then tap your memory bank. During the financial meltdown of 2008 – 2009, Citigroup sold into low-single digits and then employed a reverse split to get back into the respectable teens. Bank of America’s BAC $25 preferred stock sold down to $5 a share. I bought a bunch, but management didn’t offer me newly issued warrants, like they did for Warren Buffett who threw them a multibillion-dollar lifeline.
To Jamie Dimon’s credit, JPMorgan sailed through this financial hailstorm comparatively intact. It’s why his bank sells at a premium to book value while Citigroup ticks at a deep discount. An enormous gap in price-earnings ratios exists, too.
Even on normalized earnings, today, perhaps a nonexistent concept, Citigroup sells under 10 times earnings and JPMorgan in low teens. Such variance reflects as well the different constructs of their business, particularly offshore earnings concentration.
Critical variance in Citigroup’s September quarter was in loan loss reserving at $2.26 billion vs. reserves of $7 billion, quarterly, previous two quarters. Still, the quarterly reserve covered actual loan charge-offs of $1.9 billion. Investment and corporate banking numbers bettered the consumer sector which saw card revenues down 18%. Citigroup’s return on equity is a subpar 7.9% vs. an industry norm near 13%. Expenses for controlling risk management, prompted by the Federal Reserve Board could add a billion to Citigroup’s cost structure.
Stepping back from such variables, it won’t be before 2022 that analysts, anyone, can more than stab at Citigroup’s normalized earnings power. As a horseback number, let’s slap a 10% ROE on net tangible book value. You’d approximate at least $6 a share. The major variable could be loan loss reserving which is unpredictable.
Broad-brush, if you believe in a robust economic setting emerging next 12 months consider Citigroup peaked at $80 a share as little as nine months ago. Bank stock investors then saw nothing but blue sky: Healthy net interest margins and good numbers for investment banking, trading and their investment advisory sector.
Investing in banks, all said, is the reciprocal of owning e-commerce and internet paper like Amazon AMZN , Facebook and Alibaba BABA . They swim in redundant capital surplus and cash flow, beneficiaries of Covid-19 depressants on shut in consumers.
I rationalize heady valuations for such growthies easier than I can figure out what is average earnings power for our major banking properties. My probe into Citigroup cost 5% intraday. Looking for more trouble, I stutter-stepped over to JPMorgan Chase, the prestige property in banking selling at a 20% premium over book value.
JPMorgan is a massive construct with some $235 billion in book and a market capitalization of $280 billion. This is under one-third of Facebook’s market capitalization. Jamie discarded his tie, but I wanna see him in a gray T-shirt and long hair.
JPMorgan does sell at a comfortable premium over book, but its numbers are no easier to unscramble than poor Citigroup. There’s something grating for me in this disparity. I’ve an eerie feeling that Jamie first decided on what his bottom line should look like and then scrambled his numbers as to loan losses, reserving conventions and quarterly charge-offs.
There’s no way for outsiders to challenge numbers, specifically quarter-by-quarter. It’s ludicrous to multiply by four JPMorgan’s September quarter’s earnings. If you did so, the stock would be selling around 12 times earnings, an historically low valuation for a property that historically sells at a premium to other bank stocks and closer to the market’s multiplier of earnings. On book value JPMorgan’s premium is about 50%, tops for financial properties.
Quarterly numbers stunned me into bewilderment. How go from a second quarter’s loan loss provision of $10.4 billion to $610 million in the September quarter? What’s normal? Good question! Go back to the third quarter of 2019, pre-Covid-19 when the loss provision was $1.5 billion. I’d consider $10 a share, a 15% ROE as a fairly normal number.
Markets are right not to believe normality prevails in banking. If you believed so at yearend, 2019, when the stock peaked around $140, you rode this paper down to par. Amazon ticked around 2,000, yearend 2019, now at $3,000, nearly a snappy 50% advance. For JPMorgan, there were sizable reserve releases September quarter in commercial banking and the corporate and investment bank.
The most stable business sector is asset and wealth management, also helped by reserve releases. On one of the boards I sit on, JPMorgan’s portfolio performance past couple of years stands mediocre. Not enough emphasis on high-yield bonds and pretty much missing the bull market in technology. Wealthy investors accept some underperformance because they believe the bank won’t grossly underperform in its traditional 60 / 40 equity, bond construct.
I pass on JPMorgan as too efficiently priced with its built-in premium over the entire banking universe. Citigroup, in the throes of an operational makeover, has possibilities, but the dust needs to settle. I can’t construe as yet average earnings power over a full cycle – good year, normal year and down year. Financials, near a 10% sector weighting in the S&P 500 Index, suffer in a low-interest rate setting.
When I turn to technology, the leading market sector at 25% of the S&P 500, I’m still overweighted and so far, comfortable.
Back in the sixties, I remember what Morris Shapiro told me. Morris was the leading trader in bank stocks which then all sold OTC. “Martin. There are more banks than bankers in the world.”
Sosnoff and/or his managed accounts own Citigroup, Amazon, Facebook and Alibaba.