How Have Price-To-Book Ratios For The Country’s Biggest Banks Changed In The Last 5 Years?

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The P/B ratios of the largest U.S. banks vary from a high of over 200% for U.S. Bancorp to a figure of just 80% for Citigroup. Notably, the rally in bank shares since the U.S. presidential election has led the average P/B ratio for the 7 largest banks to over 130% – the highest level since the economic downturn of 2008.

AB_QA_PB_FY16

The P/B ratio compares the share price with the bank’s underlying financial condition (captured by the book value per share), and can indicate whether the shares are being priced too cautiously or too aggressively. Marked differences between the price of a company’s shares compared to its book value are often a sign of under- or over-valuation. At times, however, 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.

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The table below summarizes the change in P/B ratio for these banks from the lows seen at the end of 2011, with the color gradation along a row added to help understand the overall trend for a particular bank.

AB_QA_PBChange_FY16

Notably, U.S. Bancorp’s P/B ratio figure has largely remained around 200% over 2013-16. 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, primarily thanks to its aggressive acquisition policy 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.

While Wells Fargo’s shares still enjoy a premium of ~60% to their book value, the bank stands out as the only one to witness a decline in P/B ratio compared to 2015 due to the negative impact of its account-opening scandal on investor confidence. The country’s largest banking group, JPMorgan Chase, and 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. Both these banks are expected to witness strong revenue gains from the positive outlook for interest rates as well as from a softer stand by the Trump administration towards restrictive bank regulations.

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. The bank’s share prices have recovered considerably since then as the bank diligently worked through its legal backlog and cleaned up its balance sheet over the years. While the bank’s share price came very close to its book value last month, the fact that the P/B ratio still remains under 100% indicates that investors still have some concerns about its loan book.

As for Citigroup, the bank’s geographically diversified nature makes it less dependent on interest rates in the U.S., because of which its shares haven’t gained to the same extent as its other U.S.-based peers. While the bank announced that is has finally cleaned up its non-core asset division, Citi Holdings, enough to stop reporting it as a separate operating division, Citigroup’s P/B ratio of 80% can be largely explained by the uncertain economic outlook for key developed and developing nations over coming years – especially in the U.K., Mexico and China, where Citigroup has a sizable banking presence.

See Trefis analysis for U.S. Bancorp | Wells Fargo | Goldman SachsJPMorganMorgan StanleyBank of America | Citigroup

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