Are JPMorgan Chase (NYSE: JPM), Goldman Sachs (NYSE: GS) and Other Major Banks Trading at Liquidation Value?

Since the financial crisis of 2008, the stock prices of major banks have been in a state of flux. Although they’ve risen substantially, research now shows that they remain quite the bargain.

The KBW Bank Index trades at 95 percent of book value, a level never seen before 2008, while stocks of lenders in Europe and Japan are also lower than their assets minus liabilities. Financial firms in the Standard & Poor’s 500 Index have risen 6 percent this quarter before today, the smallest gain for any industry and about half the return for the gauge of American equity. Since the collapse of Lehman Brothers, investors don’t appear willing to pay more than liquidation value for banks, even in developed nations. The combination of slowing economic growth, the weak U.S. housing market and increasing regulation mean bank profits will be limited and bad loans may increase.

Mark Bronzo, an Irvington, New York-based fund manager at Security Global Investors, which oversees $21 billion commented “I don’t know that trading results will be great, and I don’t know that lending results will be great, but it’s not going to matter because credit is improving fast enough that banks are going to look good and their book value’s going to grow. The sector’s going to do well.”

The shares of JPMorgan Chase (NYSE: JPM), the second largest US bank as measured by assets, is trading at 97% of book value. UniCredit SpA, Italy’s largest financial company is trading at only 57% of book value, as compared an average of 171% during the prior 10 years.

Rafi Zaman, Managing Director of global equities at DuPont Capital Management in Wilmington, Delaware comments “Investors are still scared right now, scared that if you go into a double-dip or deflation then maybe the credit quality will worsen and that won’t be good for banks. But if we’re going to a slow-growth recovery, which is what our view is, then these banks should be a decent place to be invested.”

Mary Chris Gay, a fund manager at Baltimore-based Legg Mason Inc., which oversees $645 billion added “As we see continued improvement even at the margin, that should help rebuild confidence and ultimately close the gap between the price and the value. Groups that do lead the market are historically very cheap at the low point of the cycle.”

In the end, only time will tell if these firms return to their pre-2008 trading multiples, but on a book basis, their discounted trading value is painfully evident.