A Look At The Price-To-Book Ratios Of The Country’s Largest Banks

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Over the last three years, investor confidence in the country’s banking sector has grown steadily thanks to a marked improvement in economic conditions, focused efforts by the banks to revamp their business models and to work through their legal backlogs, and also due to a slew of regulatory changes aimed at strengthening the sector. This has helped the shares of most banks regain the value they lost in the wake of the economic downturn of 2008. But this improvement has not been uniform for all the banks. While some of them have fared much better than average and have seen their share prices reach historic highs, a handful of them are still trading at well below the levels seen in late 2007.

In this article, we study the trends in price-to-book (P/B) ratios for the country’s biggest banks since 2011 in an attempt to understand whether the growth was due to tangible improvements in the banks’ balance sheets, or primarily due to a shift in investor sentiment. As the metric compares the share price with the bank’s underlying financial condition (captured by the book value per share), it helps understand whether the shares are being priced too cautiously or too aggressively.

See our full analysis for Bank of AmericaCitigroupJPMorgan Goldman SachsMorgan StanleyWells FargoU.S. Bancorp

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Marked differences between the price of a company’s shares compared to its book value are often a sign of under- or over-valuation. But sometimes, very low P/B ratios may actually be because of serious problems with the company’s business model, whereas high P/B ratios could very well be because of strong optimism about the future potential of a company’s business model. The table below shows the P/B ratios for the country’s largest banks at the end of each of the last three years as well as at the end of the last two quarters. The figures are obtained by dividing each bank’s closing share price on the last trading day for the period with the book value per share figure at period end reported by the banks in their respective quarterly SEC filings.

FY 2011 FY 2012 FY 2013 Q1 2014 Q2 2014
U.S. Bancorp 164.6% 174.4% 202.8% 209.3% 206.5%
Wells Fargo 111.9% 123.7% 154.0% 163.2% 168.5%
JPMorgan 71.4% 85.8% 109.8% 112.3% 103.8%
Goldman Sachs 69.4% 88.2% 116.3% 105.9% 105.8%
Morgan Stanley 48.2% 62.4% 97.1% 96.3% 96.6%
Bank of America 27.7% 57.4% 75.2% 82.9% 72.6%
Citigroup 43.3% 64.3% 79.8% 71.9% 70.6%

The wide range of P/B ratios for these banks stands out in the table above. While Bank of America (NYSE:BAC) and Citigroup (NYSE:C) trade at less than three-fourths of their book value, JPMorgan’s (NYSE: JPM) share price hovers around its book value, whereas U.S. Bancorp (NYSE:USB) finds itself at the far end of the spectrum with its shares demanding more than double what they are worth on its books.

Bank of America’s stock was trading at less than a third of its book value in late 2011 due to rising fears about the quality of the bank’s loan portfolio, as well as a spurt of high-profile lawsuits. While the bank’s share prices have recovered considerably since then, the P/B ratio fell from 83% in Q1 2014 to below 73% in Q2 2014 as concerns about trading revenues, shrinking net interest margins and the bank’s failure to settle its mortgage related row with government agencies hit its share price. The bank’s $17 billion mortgage settlement last week should help this figure improve by the end of this quarter, but it will take several quarters for the bank’s share price to catch up with its $21 book value.

Citigroup faces a similar fate to Bank of America with its slow-off-the-block performance in recent years, and the billions of non-core assets housed under Citi Holdings reducing its value in investors’ eyes. The bank fell to the lowest position in this list by the end of Q1 2014 due to the sharp decline in its share price in March after its capital plans were rejected by the Fed as a part of its stress tests (see Why The Fed Rejected Citigroup’s Capital Plan).

The country’s largest banking group, JPMorgan Chase, and premier investment bank Goldman Sachs have historically been priced close to their book values despite having substantially different business models. While the former’s business model, which was barely affected by the economic downturn, is perceived by investors as stable and mature, the latter elicits strong confidence from investors due to its strength in the investment banking industry.

In sharp contrast to these banks, U.S. Bancorp’s P/B ratio figure has an interesting story to tell. Investors love its plain vanilla traditional banking business and value the country’s largest regional bank at more than twice what it is worth on paper. The biggest reason for this is the bank’s aggressive acquisition policy, which has helped it grow its business considerably since the economic downturn. Also, U.S. Bancorp is very balanced in the banking services it offers – something that acts as an additional hedging policy to an already risk-averse business model.

The graph below summarizes the performance of these banks’ shares over the last 52-week period compared to their book values. Each bar represents the range at which shares of a particular bank have traded over the last 52 weeks (the 52-week high and low values) and the dot shows the book value relative to the market price range. The banks have been rearranged in terms of book value. The graph demonstrates the observation we made earlier that shares of U.S. Bancorp and Wells Fargo have consistently traded at a premium to their book value, shares of JPMorgan and Goldman have fluctuated around their book value, while shares of Bank of America and Citigroup are well below their book value.

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