Like in an ultramarathon (or relationship), when investing, it’s easy to go too hard early. Success requires patience.
Watching the share prices of Citigroup (NYSE: C), Wells Fargo (NYSE: WFC) and Bank of America (NYSE: BAC) languish after releasing third quarter earnings that I thought were pretty good reminded me of that…
I went into this earnings season expecting that a drop in loan-loss provisioning would be the catalyst that would move bank shares higher.
I was right about the big improvement in loss reserves.
Citigroup’s provision for credit losses dropped from $7.9 billion in the second quarter to just $2.26 billion in the third quarter.
Wells Fargo’s provisions fell from $8.4 billion to just $769 million. Bank of America’s provisions declined from $5.1 billion to only $1.4 billion.
These declines exceeded my optimistic expectations, yet they failed to light a fire under the stock prices of the banks. Instead, the share prices of these companies dropped.
Instead of feeling relief that the worst of loan-loss provisioning is now behind us, the market focused on the damper that low interest rates are putting on lending income.
It’s a legitimate concern…
And with the Fed signaling low rates for the foreseeable future, interest rates are going to be a headwind for banks’ earnings growth for a while.
While low rates aren’t helpful, when I look at the big banks, I see stocks that are historically cheap on traditional valuation metrics.
Citigroup and Wells Fargo especially, which are trading at just 50% of book value, are almost comically inexpensive.
Combine that with the fact that the balance sheets of the banks are also historically strong, and these rock-bottom valuations are even more appealing.
Given these valuations and the fact that shares could easily double, the downside is virtually nonexistent.