Q2 2015 U.S. Banking Review: Price-To-Book Ratios

Shares of U.S. banks have rallied for the most part this year, with optimism about economic conditions and the prospects of an interest rate hike driving prices, though the Greece debt turmoil offset that a bit at the end of June. The shares of most U.S. banks have seen gains in recent quarters thanks to their efforts to streamline their business models; while many have seen their share prices reach historic highs in recent months, a handful are still trading well below the levels seen in late 2007.

In this article, we discuss the trends in price-to-book (P/B) ratios for the country’s biggest banks since 2011, and 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 America | Citigroup | JPMorgan | Goldman Sachs | Morgan Stanley | Wells Fargo | U.S. Bancorp

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 problems with the company’s business model, whereas high P/B ratios could be due to optimism about the future potential of a company’s business model. The chart below shows the P/B ratios for the country’s largest banks at the end of each quarter since Q1 2011. The figures are obtained by dividing each bank’s closing price on the last trading day for the period with the book value per share figure reported by the banks in their respective quarterly SEC filings.

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 around 80% of their book value, JPMorgan’s (NYSE: JPM) share price hovers around its book value, whereas U.S. Bancorp‘s (NYSE:USB) P/B ratio is nearly 200%.

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 price has recovered considerably since then, its P/B ratio fell to the lowest level among these banks in Q1 2015 and only improved slightly in Q2. Citigroup has faced a similar fate 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. However, its efforts in clearing its mortgage-related problems, and its strong recent operating performance has boosted this figure since then.

In sharp contrast to these banks, U.S. Bancorp’s P/B ratio figure is around 200% as investors love its plain vanilla traditional banking business. The bank’s aggressive acquisition policy has helped it grow its business considerably since the economic downturn, but it remains 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 shows the shares of U.S. Bancorp and Wells Fargo consistently trading at a premium to their book values, while shares of JPMorgan, Goldman and Morgan Stanley have fluctuated around their book values, and Bank of America and Citigroup’s shares remain well below their book value.

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