Thursday, 15 January 2015

Bank of America and Citigroup: more financial sector legal headaches

Yesterday I wrote up the J P Morgan and Wells Fargo numbers with the observation that 'two big banks, two wait for lower levels' after a romp through the numbers heavy with legal costs and related.
Looking through today's Citigroup and Bank of America statements it is not difficult to come to a similar conclusion.  Back in October I concluded that the former was only interesting below US$50 a share and after a legal heavy announcement today ('the US bank made $350m, or 6 cents a share, of profits in the final three months of the year as $3.5bn legal charges and restructuring costs hit') unsurprisingly the shares have fallen back below this level again:


No surprises there.  Just looking at the materiality of the 'legal and repositioning' line and the messiness this leads to below this tells you everything you need to know: 

Now the above and relative dullness at the core Citicorp business and excessive 'volatile volatility' in its trading businesses (more fixed income division results seem the norm) helped contribute to the tangible book value per share pulling back...

...but the real confusion comes in the return on tangible capital employed which is - at an aggregate level - simply all over the place.  What core number to use?  You could make a case for 6%, 7% or even (bullishly and anticipating some progress/normalisation) 9-10%.
All of this matters because that nicely sub US$50 share price the company is trading at is discounting something like a 8.5% RoTCE.  Cheap enough...well a bit like J P Morgan at the above link it depends how much of a bull you want to be going forward.  Technically though I am struck that the US$46s is kind of an interesting level. 

Turning to Bank of America I almost stopped the analysis when I read on Seeking Alpha that 'the headline revenue figure of $18.73B missed estimates by a wide margin, but included $1.2B in negative FVA and DVA adjustments. Headline EPS of $0.25 missed by $0.07, but those same adjustments lowered EPS by $0.07'.  Another analytical challenge awaits...

So let's keep it simple.  At least at face value return on tangible common equity continued to rise (and charge-offs remained low)...


...and applying the former statistic to the tangible book value per share gives a theoretical value today of around US$11.
And the share price today?  A little higher than that.  Just like Citigroup as "one-offs" drop out you will get a higher theoretical value...and I am sure this is what the share is discounting but given a choice between the two stocks it is Citigroup that remains more of interest (although still a 'watch' today as noted above). 


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