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Analyzing Banks’ Price-to-Book Value Ratios

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Price-to-book ratios

Generally, banking stocks (XLF) trade between 1x and 2x their book values. Stocks trading lower than their book values attract investor attention because they’re considered to be generating extremely poor returns. The PBV (price-to-book value) compares a company’s current market price to its book value. These ratios are commonly used to compare financial services firms because most banks’ assets and liabilities are constantly valued at market values. If a company trades lower than its book value, it means that either the asset value is overstated or the company is generating a poor return on its assets.

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Banks’ valuations

Currently, Citigroup (C), Goldman Sachs (GS), and Bank of America (BAC) are trading below their book values. In comparison, J.P. Morgan (JPM), Wells Fargo (WFC), and Goldman Sachs trade at reasonable valuations. Bank of America, Citigroup, and Goldman Sachs trade at PBV ratios of 0.57x, 0.59x, and 0.8x, respectively. This implies a discount of 43%, 41%, and 20% to their respective book values. Such cheap valuations are associated with a bank in crisis. They’re also a sign of the company’s poor profitability. However, if interest rates go up and trading activities pick up, these companies’ profitability would improve. They would have significant upside potential.

In comparison, J.P. Morgan and Wells Fargo trade at PBV ratios of 1.01 and 1.38x, respectively.

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