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Big Bank Stocks Are Still Cheap, Says Oppenheimer

NEW YORK (TheStreet) -- Despite a spectacular sector run-up this year, stocks of major U.S. banks are trading at just half their historical average levels to tangible book value, according to Oppenheimer analyst Chris Kotowski.

The KBW Bank Index I:BKX closed at 67.29 Thursday, rising 31% this year.  Here's a quick look at the valuations for the six large-cap banks covered by Kotowski:

  • Shares of JPMorgan Chase (JPM - Get Report) closed at $57.22 Thursday.  The shares traded for 1.6 times tangible book value, according to Thomson Reuters Bank Insight, and for 9.5 times the consensus 2014 earnings estimate of $6.01 a share.  The consensus 2015 EPS estimate is $6.37.
  • Bank of America (BAC - Get Report) closed at $15.59 Thursday and traded for 1.2 times tangible book value and 11.6 times the consensus 2014 EPS estimate of $1.34.  The consensus 2015 EPS estimate is $1.60.
  • Citigroup (C) closed at $51.73 Thursday and traded for just below tangible book value and 9.5 times the consensus 2014 EPS estimate of $5.42.  The consensus 2015 EPS estimate is $5.96.
  • Wells Fargo (WFC) closed at $44.08 Thursday and traded for 2.2 times tangible book value and 11.0 times the consensus 2014 EPS estimate of $4.01.  The consensus 2015 EPS estimate is $4.22.
  • U.S. Bancorp (USB) closed at $38.86 Thursday and traded for 3.2 times tangible book value (according to Kotowski) and 12.1 times the consensus 2014 EPS estimate of $3.20.  The consensus 2015 EPS estimate is $3.45.
  • Shares of Capital One Financial (COF) closed at $69.63 Thursday and traded for 1.6 times tangible book value and 10.0 times the consensus 2014 EPS estimate of $6.96.  The consensus 2015 EPS estimate is $7.46.


In a note to clients on Thursday (based on his firm's figures and Wednesday's closing prices), Kowtoski wrote that the large-cap banks covered by his firm were "right in line" with the historical average, with an average forward price-to-earnings ratio of 10.6, which was 72% of the average forward P/E of 14.7 for the S&P 500 (^GSPC)

But the six big bank stocks stocks trade at just "half their historical level," with an average price-to-tangible-book ratio of 1.8, according to Kotowski.  For the 12-year period through 2006, the year-end average price to TBV ratio for the group was 3.6.

"A lot of investors respond by saying 'Well that of course makes perfect sense: Between the higher capital requirements, Durbin, Volker and all the other regulations, ROEs will be lower in the future than in the past'," Kowtoski wrote.  But the analyst disputed that notion by writing "Therefore I get a free option on the prospect that bank returns will trend towards normal over time."

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