The earnings season started on Friday with the big US banks ($KBE) reporting Q4 earnings.
Citigroup, Bank of America, Wells Fargo and JPMorgan all beat analyst estimates.
2023 was a difficult year for most US banks because of the banking mini-crisis that broke out in California in March.
JPMorgan, the highest-quality large US bank, showed its class again in 2023, navigating increased interest rates deftly, and saw its share price increase almost 30%.
Bank of America, by contrast, trailed its competitors, and the shares ended up flat for the year. The company had bought too many long-dated bonds when interest rates were low, and was hit with more unrealised losses on its balance sheet as a result than the others.
In early 2024, the big US banks trade at valuations that are not expensive, but nor are very cheap. JPMorgan trades at 11x 2024E earnings; Wells Fargo, 10x; Bank of America, 10x. Citigroup is somewhat cheaper at 9x, but this is explained by its impaired profitability.
The valuations of the US banks suggest there may be some upside left in that group of stocks, but perhaps not a huge amount.
The situation is different in Europe, where banks still trade at bargain valuations. BNP shares can be bought for 7x 2024E earnings; Santander 6x; ING 7x.
The valuation differential between the US and Europe is at a record high.
It is true that the US economy is doing better than its European counterpart. However, I would argue that even after accounting for this fact, the valuation differential is excessive.
The portfolio is thus overweight European banks, while US banks hardly feature.