Generally, banking stocks (XLF) trade between 1x–2x their book values. Stocks trading lower than their book value attract investor attention because they are considered to be generating very poor returns. The 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 set at market value. 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.
BNY Mellon (BK) trades at a 24% premium to its book value and 18x its one-year forward earnings. Its peers State Street (STT), Northern Trust (NTRS), BlackRock (BLK), and Franklin Resources (BEN) are trading at price-to-book ratios of 1.4x, 2.1x, 2.1x, and 1.9x, respectively.
As BNY Mellon begins to improve and sustain its margins, the stock’s valuation gap should narrow, especially if the industry as a whole is able to rebound.