Big American banks have plenty to prove in 2013. Wells Fargo aside, their valuations have languished below book value. After a strong 2012 for stock markets and with fourth-quarter earnings reports imminent, JPMorgan and Goldman Sachs are again near that level. But when they get there, it will be a relief rather than anything to crow over.
Bank of America doubled its market capitalization last year, while JPMorgan added a third to its value in spite of the blow it suffered from the so-called whale trade that went awry. Yet, the advances really only made up for ground lost the year before. Sure, banks worked through more of their postcrisis hangovers and investors gathered more confidence in them. But there’s little sign of a noticeably brighter future.
One problem is that most giant financial institutions are still struggling to deliver returns on common equity that match their cost of capital, often taken to be around 10 percent. Goldman, the investment banking top dog, booked 30 percent-plus return on equity in the run-up to 2008, but that number was still in single digits for the first three quarters of 2012. JPMorgan did a bit better over that period, but other factors — perhaps including the memory of the whale trade — are also in play.
And fourth-quarter earnings aren’t expected to signal anything more cheerful. Fiscal temporizing in Washington and the interruptions caused by Hurricane Sandy probably took a bite out of trading revenue, while recent mortgage foreclosure settlements could mar earnings. News this week of more job cuts at Morgan Stanley is a reminder that headcount, pay or both remain too high in places.
Still, shares of the better-placed Wall Street firms are at least trading near their reported book value. Goldman is closest, at a modest 2 percent discount to book value on Thursday. That should help Lloyd C. Blankfein, the Goldman chief executive, relax a bit.
But Mr. Blankfein and his counterparts across the industry still need to squeeze costs and show they have profitable businesses for the new market normal. They have to learn to live with the strictures and costs of still-solidifying regulations. And they need to work through more of the mortgage litigation, which continues to bite. Step by step, the banking bigwigs can show investors they are putting these concerns behind them as 2013 unfolds. But they can’t do much about Washington’s inability to decide on a fiscal course. No wonder investors remain wary.