The broad indices ended relatively flat, but the KBW Bank Index (I:BKX) rose 0.7% to close at 70.14, after Automated Data Processing said the U.S. economy had added 139,000 nonfarm private-sector jobs during February. That number was down from 175,000 in January, while also falling well short of the consensus estimate of 160,000, among economists polled by Reuters.
The unusually cold and stormy weather in many parts of the United States continued during ADP's February survey period. But this could mean better numbers are just around the corner. In a morning report to clients, Deutsche Bank's equity research team wrote, "If weather dampens hiring there is usually a large snapback in ensuing months."
In another disappointing report on Wednesday, the institute for Supply Management said its non-manufacturing index for February had declined to 51.6%, down from 54.0% in January. Economists had expected the NMI to come in at 53.8%. A reading above 50% indicates expansion.
Bank of America's shares have 11% this year, following a 34.5% return during 2013. The shares trade for 1.3 times tangible book value, according to Thomson Reuters Bank Insight, and for 10.6 times the consensus 2015 earnings estimate of $1.62 a shar6e.
That price-to-forward-earnings valuation is the second highest among the "big four" U.S. banks, even though Bank of America had the lowest returns on average tangible common equity (ROTCE) among the group over the past two years.
Bank of America's 2013 ROTCE was 7.94%, improving from 2.96% in 2012, according to Thomson Reuters Bank Insight. Here are all of the same numbers for the rest of the big four, followed by some interesting numbers in Bank of America's favor.
- Citigroup's (C) shares closed at $49.42 Wednesday. The shares are down 2% this year, after a 32% return during 2013. The shares trade for 0.9 times tangible book value, and for 8. times the consensus 2015 EPS estimate of $5.73. Citi's 2013 ROTCE was 8.20%, improving from 4.80% during 2012.
- Shares of JPMorgan Chase (JPM) closed at $58.16 Wednesday. The stock is up slightly this year, following a 37% return in 2013. The shares trade for 1.4 times tangible book value, and for 9.2 times the consensus 2015 EPS estimate of $6.35. The bank's ROTCE for 2013 was 11.92%, down from 14.72% the previous year.
- Wells Fargo (WFC) closed at $47.07 Wednesday. The shares have returned 4% this year, following a 37% return during 2013. The shares trade for 2.0 times tangible book value, and for 11.1 times the consensus 2015 EPS estimate of $4.25. Wells Fargo's ROTCE for 2013 was a strong 17.72%, increasing from 16.70% in 2012.
One of the reasons Bank of America's shares trade at a higher forward P/E ratio than Citigroup and JPMorgan is the perception that the company is very well positioned to ride the continued improvement in the U.S. economy and housing market.
Another reason may be the positioning of the bank's balance sheet for an expected rise in interest rates. Bank of America, like the rest of the big four, is "asset-sensitive," meaning that when long-term and short-term interest rates rise in tandem, its assets will reprice faster than its liabilities, widening its net interest margin and growing its net interest income.
During 2013, as investors anticipated the Federal Reserve's eventual announcement of a tapering of bond purchases by the central bank, the market rate on 10-year U.S. Treasury bonds rose by 118 basis points to 3.04% on Dec. 31. Meanwhile, Bank of America's net interest margin expanded to 2.46% in the fourth quarter from 2.34% a year earlier. The rest of the "big four" saw their margins narrow last year.
While long-term rates rose last year, short-term rates remained low, since the Fed kept the short-term federal funds rate in a historically low target range of zero to 0.25%. But the central bank is expected to begin raising the federal funds rate after it finishes winding down the bond-buying program at the end of 2013.
Despite a pull-back in long-term rates so far this year, the long-term trend of a rising yield on the 10-year bond is expected to continue.
The large banks have all recently filed their annual 10-K reports with the Securities and Exchange Commission. All the banks have included discussions on interest rate sensitivity.
Bank of America in its 10-K said that based on its Dec. 31 balance sheet, if long and short-term interest rates were to rise in parallel by 100 basis points, its annual net interest income would increase by $3.229 billion. That would be a 7.5% increase from the company's 2013 net interest income of $42.265 billion.
Citigroup in its 10-K said under the same scenario its net interest income would rise by $1.838 billion, or 3.9% from its 2013 net interest income of $46.793 billion.
JPMorgan said under the same scenario of a 100 basis-point rise in long-term and short-term interest rates, its annual net interest income would increase by $2.518 billion, or 5.8% of its 2013 net interest income of $43.319 billion.
Wells Fargo took a more broad approach to its interest rate sensitivity analysis discussion in its 10-K, factoring-in the expected decline in non-interest income from declining mortgage lending activity in a rising-rate environment. The company said that among several rising-rate scenarios it had considered, the "most likely" include an increase in the federal funds to 0.50% and an increase in the yield on 10-year Treasury bonds rising to 3.60% over the next 24 months.
"Currently, our profile is such that net interest income will benefit from higher interest rates as our assets reprice faster and to a greater degree than our liabilities, and, in response to lower market rates, our assets will reprice downward and to a greater degree than our liabilities," Wells Fargo said.
All four of the big four are well-positioned for the expected rise in interest rates, although Wells Fargo didn't provide specific net interest income estimates. But Bank of America's discussion of the advantage of its asset sensitivity was particularly impressive.
This chart shows the performance of the big four against the KBW Bank Index and the S&P 500
data by YCharts