Determining the fundamental equity values of big money centre banks is notoriously difficult. Their balance sheets are opaque, management often incapable of accurate guidance, business plans overly-complex and earnings easily manipulated. The addition of ever-changing government aid programs has only made the task of valuing bank stocks even more difficult.
Bank executives frequently claim that their stocks are trading way too low. But they’ve been saying this all the way down, as stocks dropped from all time highs to penny-stock levels. Some of the most famous bank analysts seem to take the opposite tact: bank stocks are never low enough. Indeed, some say that the equity value at a couple of big banks is zero.
So who is right? Doug McIntyre at WallSt 24/7 argues that neither the doom & gloomers or the bank touts are likely to be correct. He argues that we should take our guidance from the market. In short, big bank stocks are likely to be accurately priced because they are heavily traded, highly liquid and broadly held. They are the picture of an effecient market, he argues.
Left out of the conversation about bank values are the actual prices of the stocks. It has been the standard proxy of value for decades and there is little reason to change this now…
Citigroup trades at $2.72 now. All the harsh talk from bank analysts pushed the stock down by less than 5% yesterday. That means a lot of investors gave the alarmists little credence. Maybe they want to see Citi’s first quarter earnings before they decide what the bank is worth. Since the stock is down from over $55 less than two years ago, no one is assuming that the bank is going to earn billions of dollars for the quarter. The question is probably how few billion it will lose.
The most powerful argument that bank experts make about why Citi is not valued correctly is that, first, no one has access to its books, and second, the bank has so many levels of debt and equity that no one can unravel what the convertible preferred and senior notes are worth, let alone the common stock. That point of view leaves out the most obvious aspect of valuing Citi’s stock which is that it is followed by thousands of experts. Cit trades over 400 million shares a day. With that much volume and that many experts, the market for evaluating the bank’s stock is probably as efficient as it is for any publicly traded stock in the world. Citi’s value changes by the second and on some days its market cap moves by over $1 billion in a few minutes. What analysts want their clients and the media to believe is that virtually all of the people who own and trade the bank’s shares are idiots. That could only be possible in a perfect world.
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