In this clip, Industry Focus: Financials host Michael Douglass and Fool.com contributor Matt Frankel discuss how investors can interpret the valuation of bank stocks, and how the three biggest universal banks stack up. They also discuss the relative profitability of the three, and why the expensive one is so, well, expensive.
A full transcript follows the video.
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This video was recorded on Jan. 29, 2018.
Michael Douglass: Let's go ahead and take a look at part two, which is, how expensive is the bank? When it comes down to it, valuation is really critical in banks, because as you mentioned, Matt, we're not seeing, for these big banks, a ton of growth. I mean, sure, listen, single-digit deposit growth and loan growth is great. And single-digit revenue growth is great, too. You're not going to tend to see double-digit growth here. So valuation becomes really important because these are large, mature companies.
Matt Frankel: Yeah. There's a couple of different ways you can value bank stocks. Price to earnings is the traditional valuation metric, it's used to pretty much for every sector of the market. And that's definitely helpful here. My favorite way to evaluate banks is the price to their tangible book value, or just their book value, depending on which one you're looking at. Price to tangible book value is how much a bank's stock is trading for relative to the value of its assets. In other words, if a bank decided to close its door today and sold off all of its assets, how much could it reasonably get? If you include things like goodwill and brand name, stuff like that, that's your price to book value. If you don't include any of those intangible items, as the name implies, that's your tangible book value.
As far as these three banks go, this is where it starts to get a little bit different. Citigroup (NYSE: C)is by far the cheapest of the three. They trade at just over 1.1 times their book value, 1.3 times their tangible book value. Bank of America (NYSE: BAC) is the middle one here. They trade at about 1.35 times their book value, 1.9 times their tangible book. JPMorgan [Chase] (NYSE: JPM) is the expensive one, about 1.75 times their book value and 2.2 times their tangible book. With banks, though, you have to remember, you're getting what you pay for. Citigroup has a lot of risky assets on its balance sheet, mainly left over from the financial crisis. And you see that, as your valuations go up among these three, you see less and less of that risky stuff on there.