Owners of Wall Street banks are being taken for a Washington ride. The S. & P. 500 Bank Index has surged 12 percent since Sept. 8. That is not justified by the trajectory of earnings, as JPMorgan Chase and Citigroup reported results Thursday that were no better than steady. Tax cuts would support higher stocks, but they’re at best some way off. In the meantime, banks have other concerns.
JPMorgan Chase and Wells Fargo each trade around 50 percent above their book value. Goldman Sachs and Morgan Stanley are neck-and-neck at some 1.3 times book, while the laggards Bank of America and Citigroup trade at par.
Using the rule of thumb that big banks need to deliver 10 percent returns for their shareholders, JPMorgan Chase’s valuation means it ought soon to be cranking out a 15 percent return on book equity. Yet the bank run by Jamie Dimon will hit a return on equity of only 13.6 percent by 2020, according to estimates collated by Thomson Reuters. Across the first three quarters of 2017, it managed only an annualized 11 percent.
If President Trump and Republicans in Congress succeed in cutting corporate tax rates to, say, 25 percent from the current 35 percent headline rate, that could, in theory, improve any taxpaying American company’s net profit by 15 percent — turning JPMorgan Chase’s sub-14 percent return into one above 15 percent. It’s a similar story at Citigroup. A return on equity of just over 7 percent so far this year, increasing to an estimated 8.7 percent in 2020, could get near 10 percent with lower taxes.