Citigroup Is The Most Undervalued Major U.S. Bank In Terms Of P/B Ratios

Bank shares have had a poor run so far in 2014, with the KBW bank index currently around the same level it was at the beginning of the year. The biggest factor responsible for this is the struggle of banks with sizable investment banking operations. Poor debt-trading revenues in Q1, coupled with announcements by Citigroup ( C ) and JPMorgan ( JPM ) of a continuing weakness in global debt markets over recent weeks, have resulted in investors taking a cautious approach towards these bank stocks. On the other hand, banks focused on a more traditional loans-and-deposits business model have seen notable appreciations in share value; for example, Wells Fargo ( WFC ) has gained more than 12% year-to-date.

Considering the last three years, though, all banks have seen a strong appreciation in value thanks to a steady improvement in economic conditions, their focused efforts to improve their business models and work through their legal backlogs, and a slew of regulatory changes aimed at strengthening the banking sector. In this article, we study the trends in price-to-book (P/B) ratios for the country's biggest banks since 2011 in an attempt to understand whether the growth was due to tangible improvements in the banks' balance sheets, or primarily due to a shift in investor sentiments. As the metric compares the share price with the bank's underlying financial condition (captured by the book value per share), it helps understand whether the shares are being priced too cautiously or too aggressively.

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

Marked differences between the price of a company's shares compared to its book value are often a sign of under- or over-valuation. But sometimes, very low P/B ratios may actually be because of serious problems with the company's business model, whereas high P/B ratios could very well be because of strong optimism about the future potential of a company's business model. The table below shows the P/B ratios for the country's largest banks at the end of each of the last three years as well as at the end of Q1 2014. The figures are obtained by dividing each bank's closing share price on the last trading day for the period with the book value per share figure at period end reported by the banks in their respective quarterly SEC filings.

The wide range of P/B ratios for these banks stands out in the table above. While Bank of America ( BAC ) and Citigroup ( C ) trade at notable discounts to their book value, JPMorgan's ( JPM ) share price hovers around its book value, whereas U.S. Bancorp ( USB ) finds itself at the far end of the spectrum with its shares demanding more than double what they are worth on its books.

Bank of America's stock was trading at less than a third of its book value in late 2011 due to rising fears about the quality of the bank's loan portfolio, as well as a spurt of high-profile lawsuits. And while the bank's share prices have recovered considerably since then, the fact that its P/B ratio is still just 83% shows that investors are still skeptical about its loan book and remain worried about its legal burdens. It is therefore no surprise that every time Bank of America announces the settlement of a lawsuit, investors cheer the decision with a boost in its share price, even though the settlement amounts are often billions of dollars.

Citigroup faces a similar fate to Bank of America with its slow-off-the-block performance in recent years, and the billions of non-core assets housed under Citi Holdings reducing its value in investors' eyes. The globally diversified banking group fell to the last position in this list by the end of Q1 2014 - despite faring better than Bank of America in terms of P/B ratios over recent years - due to the sharp decline in its share price in March after its capital plans were rejected by the Fed as a part of its stress tests (see Why The Fed Rejected Citigroup's Capital Plan).

The country's largest banking group, JPMorgan Chase, and premier investment bank Goldman Sachs, have historically been priced close to their book value despite having substantially different business models. While the former's business model, which was barely affected by the economic downturn, is perceived by investors as stable and mature, the latter elicits strong confidence from investors due to its strength in the investment banking industry.

In sharp contrast to these banks, U.S. Bancorp's P/B ratio figure has an interesting story to tell. Investors love its plain vanilla traditional banking business and value the country's largest regional bank at more than twice what it is worth on paper. The biggest reason for this is the bank's aggressive acquisition policy, which has helped it grow its business considerably since the economic downturn. Also, U.S. Bancorp is very balanced in the banking services it offers - something that acts as an additional hedging policy to an already risk-averse business model.

The graph below summarizes the performance of these banks' shares over the last 52-week period compared to their book values. Each bar represents the range at which shares of a particular bank have traded over the last 52 weeks (the 52-week high and low values) and the dot shows the book value relative to the market price range. The banks have been rearranged in terms of book value. The graph demonstrates the observation we made earlier that shares of U.S. Bancorp and Wells Fargo have consistently traded at a premium to their book value, shares of JPMorgan and Goldman have fluctuated around their book value while shares of Bank of America and Citigroup have yet to reach their book value since the downturn.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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