Generally, banking stocks (XLF) trade between 1x and 2x their book values. Stocks trading lower than their book value attract investor attention because they are considered to be generating extremely poor returns. Price-to-book value (or PBV) compares a company’s current market price to its book value. These ratios are commonly used to compare financial services firms because most assets and liabilities of banks 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.
Currently, Citigroup trades at a discount of ~40% to its book value. This means it trades cheaper than peers JPMorgan Chase (JPM), Wells Fargo (WFC), and Goldman Sachs (GS). Shares of Citigroup have fallen ~9% year-to-date and have underperformed its banking peers. Its PBV ratio has declined 8% in the past two months, and this may provide a good entry point for investors. Valuations in the banking space have been beaten down recently as global volatility has led to a bloodshed in stock markets. The company presently offers an attractive combination of a cheap valuation and improving profitability and a large-scale share buyback program.
Bank of America trades at a PBV of 0.64x, which implies a discount of ~36% to its book value. Such cheap valuations are associated with banks in crisis and are also signs of a company’s poor profitability. In 2015, BAC generated ROA (return on assets) of 0.74%, which was lower than its target of 1%. It generated $15.9 billion in profits. But if interest rates go up, BAC’s profitability will likely improve, and the stock has significant upside potential. The company’s strengths are its expanding profit margins and notable return on equity.