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Performance analysis and valuation comparison of large American banks in the third quarter

The financial report for the third quarter of 2017 released in the past week showed that the performance of large US financial institutions, such as Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup and Bank of America, generally exceeded market expectations.

The net operating income of Goldman Sachs in the third quarter reached US $8.33 billion, with an earnings per share of US $5.02, compared with the net operating income and earnings per share of US $8.2 billion and US $4.88 in the same period last year, respectively, and exceeded analysts' expectations of US $7.54 billion and US $4.17, mainly due to a 17% year-on-year increase in operating income from investment banking.

The operating income of Morgan Stanley, Goldman's main competitor, in the third quarter rose to $9.2 billion from $8.91 billion in the same period last year, exceeding the analyst's average forecast of $9.02 billion. In the third quarter, the net profit reached 1.78 billion US dollars, with an earnings per share of 93 cents, compared with 83 cents in the same period last year, which also exceeded the analyst's average forecast of 81 cents, mainly because the wealth management business continued to create considerable profits.

Thanks to the growth of consumer banking business revenue, JPMorgan Chase's operating revenue in the third quarter was 26.2 billion US dollars, up 2.7% year on year; Net profit was US $6.73 billion, and earnings per share was US $1.76, while net profit and earnings per share in the same period last year were US $6.29 billion and US $1.58, respectively. The growth rate of net profit in a single quarter reached 7%.

The operating income and profit of Citigroup also exceeded the market expectation, because of the excellent performance of investment banking and consumer banking. The operating revenue of Citigroup in the third quarter reached USD 18.17 billion, higher than USD 17.76 billion in the same period last year and USD 17.896 billion expected by analysts on average. Net profit was 4.13 billion US dollars, up 7.6% from 3.84 billion US dollars in the same period last year. Earnings per share was 1.42 US dollars, expected to be 1.32 US dollars.

Bank of America's operating income in the third quarter was $22.08 billion, up from $21.86 billion in the same period last year, and also exceeded the analyst's average forecast of $21.98 billion. As the rising US interest rate boosted the performance of consumer banking business and the realization of cost control objectives, Bank of America's net profit in the third quarter increased by 15% to US $5.12 billion, with an earnings per share of 48 cents, higher than the analyst's forecast of 45 cents.

There are also hidden worries behind the beautiful financial report. The volatility of "disappearance" is becoming the No. 1 enemy of Wall Street investment banks. The trading business, which used to be the pillar of operating income, went from bad to worse, and the profit shrank seriously. Since this year, although the US stock market has hit new highs, its volatility has been at a historical low level. The average year to date VIX index of the Chicago Board Options Exchange is only 11.4, lower than any comparable period in its 31 year history. In the third quarter of this year, Goldman Sachs' trading revenue fell by 17%; Morgan Stanley's bond trading revenue fell by 21%, while its stock trading revenue was basically flat; The revenue of JPMorgan Chase's entire trading department decreased by 21% to 4.53 billion US dollars from 5.75 billion US dollars in the same period last year; The trading business revenue of Citibank in the third quarter was 3.63 billion US dollars, down 15% year on year; Bank of America's trading revenue also fell 15%. However, consumer banking, investment banking and wealth management businesses have become new growth points for large banks. Goldman Sachs is also focusing on retail business. This year, it established Marcus, an online consumer loan agency, which is expected to reach 12 billion dollars in the next three years, becoming a strategic growth point in the future

According to the recently released financial data for the third quarter, we have collated the valuation tables of several major American banks. In view of the steady recovery of the U.S. economy, the healthy growth of residents' consumption, the clear attitude of the Federal Reserve to gradually increase interest rates, and the possible continuation of the low volatility of the global financial market, through comprehensive comparative analysis, we believe that Citigroup and Bank of America have the most investment value.