Dividend.com: 'Safe' Banks Look Costly

Are 'Safest' Banks Becoming Overvalued?

Some of our nation's newly-anointed "mega-banks" may be reaching share-price levels that far exceed the companies' true values.

As the unprecedented consolidation of our nation's banking system continues, some of the "safest" banks are beginning to look overbought.

Take a look at Wells Fargo(WFC Quote) shares, which are up nearly 20% year to date. This recent jump has the company trading at 3.9 times its tangible book value, which is a measure of a company's net worth, disregarding intangible assets. Typically, investment returns are better when buying shares of banks whose valuations hover in the 1.5-to-2.5 times tangible book value range.

JPMorgan Chase's(JPM Quote) valuation is also a bit high, with the bank trading around 2.63 times its tangible book value.

But the true valuation hog in the midst of the financial crisis is the venerable U.S. Bancorp(USB Quote), which currently trades at an astoundingly high seven times tangible book value. USB stock has surged almost 15% higher year to date, and that has made its current valuation extremely difficult to justify.

We may be underestimating how much Bailout Bill 2.0 will actually aid these banks in growing into their current valuations. Only time will tell, but these three bank stocks are far from cheap, and that's a big reason why we would recommend being buyers of these stocks only on pullbacks.

Wells Fargo is a recommended dividend stock, holding a Dividend.com rating of 3.6 out of 5 stars.

JPMorgan Chase is a recommended dividend stock, holding a Dividend.com rating of 3.5 out of 5 stars.