(The author is a Reuters Breakingviews columnist. The opinionsexpressed are his own.)

By John Foley

NEW YORK, Jan 16 (Reuters Breakingviews) - An old rule ofthumb is that the stock of a bank with a higher return on equityshould trade at a greater premium to its book value. GoldmanSachs GS.N and Bank of America BAC.N , which both reportedfourth-quarter 2018 earnings on Wednesday, show where this ruleof thumb falls short.

Goldmans net income of $2.3 billion for the period exceededwhat analysts had expected. The bank also navigated thetempestuous market better than its peers. Fixed-income tradingrevenue at the firm now run by David Solomon fell 18 percent inthe quarter much like rivals Citigroup C.N and JPMorgan JPM.N but equity traders picked up the slack. Goldmansheadline return on equity of 13.3 percent for the full year wasthe best in nine years, albeit helped by a one-off tax-relatedbenefit.

Bank of America exceeded expectations too, by the moreprosaic means of increasing lending. Its return on equity forthe year of 11 percent was lower than Goldmans, but better thanthe meager 7.9 percent in 2017. Boss Brian Moynihan has focusedon staying out of trouble, cutting costs and lending torelatively low-risk customers. His bank spent just $59 for each$100 of revenue in 2018, compared with an average of $73 overthe previous five years.

For now, the market is favoring Moynihans staid approach,despite his lower returns. Goldman stock trades at less than 0.9times its book value, whereas Bank of America is valued atalmost 1.1 times. For most of the last decade, the relationshipwas the other way round. One reason is that Goldman is morevolatile trading made up one-third of revenue in 2018, whileat Bank of America it accounted for only half that proportion.Solomon is addressing that by chasing more predictable incomestreams, including the Marcus retail bank.

Then theres the enduring shadow of the 1MDBmoney-laundering scandal in Malaysia, which Goldman has yet tolay to rest. Even if the market is pricing in, say, $5 billionin penalties, it would leave Goldman trading below its $79billion year-end book value. Citi, the most lowly valued of thebig banks with a history of missteps, shows trust takes years toregain. Once that happens, a more predictable kind of excitementcould close the valuation gap.

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- Goldman Sachs reported earnings applicable to commonshareholders of $2.3 billion for the fourth quarter of 2018,equivalent to $6.04 per diluted share. Analysts were expecting$4.49 per share, according to estimates from Refinitiv. Revenueof $8.1 billion was 1 percent lower than a year earlier.

- Goldmans return on equity for 2018 was 12.7 percent,absent the one-off effects of changes to the U.S. tax regime,compared with 10.8 percent the previous year.

- Bank of America reported $7.3 billion of earnings in thefourth quarter of 2018, equivalent to $0.70 per share. That beatanalyst forecasts of $0.60, according to I/B/E/S estimates fromRefinitiv.

- Revenue of $22.7 billion compared with analyst estimatesof $22.4 billion, and was up 6 percent net of tax effects. Bankof Americas return on common equity of 11 percent for the fullyear 2018 compared with 7.9 percent in 2017, on the same basis.

- Fixed-income trading revenue in the fourth quarter of 2018fell 18 percent at Goldman and 15 percent at Bank of Americafrom a year earlier. That followed a pattern set by JPMorgan andCitigroup, which reported 18 percent and 21 percent declines,respectively.

- For previous columns by the author, Reuters customers canclick on FOLEY/


<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^Goldman Sachs reports higher trading revenue, shares jump urn:newsml:reuters.com:*:nL3N1ZG3S9 BofA beats profit estimates on higher interest income, loangrowth urn:newsml:reuters.com:*:nL3N1ZG3LZ Goldman Sachs earnings https://www.goldmansachs.com/media-relations/press-releases/current/pdfs/2018-q4-results.pdf Bank of America earnings http://phx.corporate-ir.net/External.Fileitem=UGFyZW50SUQ9NDE1Mjc4fENoaWxkSUQ9LTF8VHlwZT0z&t=1&cb=636831927214596101 BREAKINGVIEWS-Banks tell a U.S. tax tale with three endings urn:newsml:reuters.com:*:nL1N1ZF0VI BREAKINGVIEWS-Markets dump coal in U.S. banks stockings urn:newsml:reuters.com:*:nL1N1ZE1T1 BREAKINGVIEWS-Citigroup is in a good place to do better urn:newsml:reuters.com:*:nL1N1ZE0E5 BREAKINGVIEWS-Goldman Sachs will spend 2019 in velvet handcuffs urn:newsml:reuters.com:*:nL3N1YF152 BREAKINGVIEWS-BofA punches above Wells Fargos weight urn:newsml:reuters.com:*:nL2N1WV0CT

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Editing by Richard Beales and Martin Langfield) ((john.foley@thomsonreuters.com; Reuters Messaging:john.foley.thomsonreuters.com@reuters.net))