The performance of the above stocks during January tracks pretty closely to how much revenue they derive from markets outside North America. Citigroup has by far the greatest exposure, with 56% of 2013 revenue coming from outside North America, according to numbers put together by KBW. Goldman Sachs and Morgan Stanley lump North American and South American revenue together. For Goldman, 41% of revenue for the first three quarters of 2013 came from outside the Americas. For Morgan Stanley, 28% of 2013 revenue came from outside the Americas.
So the big banks are still cheap. Their returns on equity won't reach their pre-crisis heights, simply because regulators are requiring the banks to hold much higher levels of capital, hoping to avoid future government bailout scenarios, but the valuations could rise considerably higher over the next few years, as long as the U.S. economy continues on its recovery path.
In a note to clients on Sunday, KBW analyst Fred Cannon wrote that his firm's analyst team had concluded that "emerging markets sell-offs tend to be buying opportunities for financial stock investors, although getting the timing right is difficult. We believe that the current position of U.S. global financial firms-extremely strong capital positions and overall improving credit-should allow history to repeat itself during the current emerging market sell-off."
When Considering Citigroup's prospects, Evercore Partners analyst Andrew Marquardt in a client note on Monday wrote, "Overall, while EM exposure is meaningful for Citi (50% of rev/earnings), we think the recent pressure in shares appears overdone based on our worst case scenario of contagion risk, ultimate loss analysis, [foreign exchange] translation analysis, etc."
Evercore estimates that the "worst case EM risk" for Citigroup could be an "ultimate" lowering of tangible book value of $6.00 per share, with earnings estimates declining 13% to 15%. Citigroup reported a Dec. 31 tangible book value of $55.38 a share, and it is the only bank mentioned here trading below tangible book.
"Further, when we balance contagion downside against potential upside longer-term, factoring in a more [normal] earnings power, etc. we see upside/downside ratio close to 2-1 which we think is compelling for investors.
Marquardt reiterated his "overweight" rating for Citigroup, with a price target of $58, implying upside potential of 33% from Friday's close.
Citigroup's shares were down another 1.5% in midday trading Monday, to $46.70.
This chart shows five-year price performance for the "big six" U.S. banks:
data by YCharts