Price-to-earnings valuation analysis
Banks within the Financial Select Sector SPDR Fund (XLF) are trading at average one-year forward PE (price-to-earnings multiples) of 12.53x. In comparison, REITS within XLF are trading at 40.3x, and insurance stocks are trading at 11.83x.
As of June 22, ten XLF banking stocks were trading below the industry average forward PE of 12.53x. Of these stocks, Citigroup (C) had the lowest PE of 9.48x, while Northern Trust (NTRS) was trading at the highest PE of 17.5x, suggesting it’s overvalued compared to the industry.
Over the last week, these ten firms have returned an average of -0.6%, compared to -1% among firms with a PE above 12.5x. Given that this performance trajectory is supported by improving economic fundamentals, valuation spreads are expected to tighten going forward.
The average PVB (price-to-book value ratio) among banks is 1.31x, as opposed to 3.65x among REITs, and 1.47x among insurance stocks. The eight banks that are trading below a PVB of 1.31x averaged a return of -0.7% in the week ending June 19. For banks above the industry average PVB, the average return was -0.9%.
In the week ending June 19, there were 15 REITs trading below the industry average PVB of 3.65x. SL Green Realty (SLG), at 1.66x, traded at the lowest PVB multiple among them and returned 0.4% over that same week. Meanwhile, Simon Property Group (SPG), with the highest PVB multiple of 11.54x, returned 1.5% over the same period.