Global Finance Woes Hold Only 'Modest Contagion' Risk for U.S. Banks
In a report published Monday, Cannon said "good arguments can be made on both sides of the contagion arguments which contrast the resilience of the U.S. economy against the global interconnectedness of financial markets," in the wake of the JPMorgan Chase trading mess and the "deteriorating conditions in Europe.
Following the "worst performance of the year last week" for the broad market, as well as for financial stocks, Canon said that "share prices are in line with global peers on a price-to-book basis relative to projected returns" for Bank of America (BAC) Bank of New York Mellon (BK), Citigroup (C), JPMorgan Chase (JPM), Morgan Stanley (MS) and State Street (STT), but not for Wells Fargo (WFC), "which trades at a premium to global peers."
The eight financials saw declines last week ranging from 6% for State Street to 11% for Morgan Stanley and Citigroup. JPMorgan's shares declined 9% last week, but have dropped 18% since CEO James Dimon disclosed the company's $2 billion in second-quarter losses from hedging trades, after the market closed on May 17.
The fallout from JPMorgan's trading loss -- which already includes investigations by the Securities and Exchange Commission, the Department of Justice, the Federal Bureau of Investigation and upcoming Senate hearings -- continued Monday, when Dimon announced at the Deutsche Bank Global Financial Services Conference that JPMorgan would suspend its common share repurchase program.
Following the completion of the Federal Reserve's annual bank holding company stress tests in March, JPMorgan's board of directors authorize $12 billion in common share buybacks for 2012, followed by another $3 billion for the first quarter of 2013.
JPMorgan's shares were down a penny in morning trading, to $33.43.
Despite the firm's "reluctance" on global banks, KBW has "Outperform" ratings on Goldman Sachs, with a price target of $150; JPMorgan Chase, with a price target of $55; and State Street, with a price target of $53.00. KBW has neutral "Market Perform" ratings on the remaining five names.
Shares of Wells Fargo closed at $30.94 Friday, returning 14% year-to-date, following a 10% decline in 2011.
Wells Fargo's shares trade for 1.9 times tangible book value, according to Thomson Reuters Bank Insight, and for eight times the consensus 2013 earnings estimate of $3.68 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $3.28.
Cannon said that "price trends reflect investor concerns about global contagion from Europe, and that the premium for WFC represents that firm's domestic concentration and low level of derivative exposure." The analyst also said that KBW was "reluctant to recommend increasing exposure to the domestic [global systemically important financial institutions, or G-SIFIs] at this point in time due to concerns of further deterioration in Europe."
Cannon rates Wells Fargo "Market Perform," with a $35 price target, estimating the company will earn $3.15 a share during 2012, followed by EPS of $3.50 during 2013.
While the company wasn't mentioned in KBW's report, U.S. Bancorp (USB) is a prime example of a large regional name with limited exposure to derivatives and to Europe, that commands quite a market premium.
The Minneapolis lender's shares closed at $30.27 Friday, returning 13% year-to-date, following a 2% return during 2011.
U.S. Bancorp trades for 2.9 times tangible book value, and for 10 times the consensus 2013 EPS estimate of $3.01. The consensus 2012 EPS estimate is $2.77.
U.S. Bancorp has been the strongest and most consistent earner among the largest U.S. bank holding companies, with returns on average assets ranging from 1.36% to 1.61% over the past five quarters, according to Thomson Reuters Bank Insight. Wells Fargo runs a close second, with ROA ranging from 1.21% to 1.30% over the same period.
KBW analyst David Konrad rates USB "Outperform" with a $37 price target, estimating the company will earn $2.81 a share this year, followed by 2013 EPS of $3.15.