Bank Stocks: Taking Off the Rose-Colored Glasses

NEW YORK (TheStreet) -- The credit crisis has changed the way analysts perceive bank stocks, and industry numbers back-up the general feeling that by "getting back to basics" the sector is setting itself up for a long healthy period.

Gone are the heady days of determining if a bank stock was simply overpriced relative to peers or earnings projections. Today, measures such as normalized earnings, tangible common equity and the Texas Ratio have come to the fore as investor as analysts consider a difficult landscape.

Tangible Book Value

For example, in an uncertain environment an investor considering a bank or thrift stock might take some comfort if the shares are trading at a low multiple of the company's tangible book value per share.

Tangible book value is common equity less intangible assets, which can include goodwill, deferred tax assets and other intangibles.

A remarkable number of banks are currently trading at the low end of this important metric. As of Tuesday's market close 632 out of 997 publicly-traded bank stocks were trading below tangible book value, according to SNL.

At the end of 2007 (when the writing was already on the wall), 141 out of that group of bank stocks traded below tangible book value. During the go-go period of easy credit at the end of 2006, only 22 traded below tangible book.

That shows just how far the sector has fallen.

The largest bank trading below book value at Tuesday's close was Citigroup (C), which closed at $3.71 or 0.9 times tangible book value according to SNL. The shares were down 7% since TheStreet featured the company in June among 10 Bank Stocks Trading Below Book Value.

Out of 23 analysts covering the shares, 12 have the equivalent of a buy rating on Citigroup, with 8 holding ratings and 2 analysts recommending investors sell the shares.

Here are some other key measures of increased importance to investors, analysts and members of the media considering bank stock valuation in a difficult landscape:

Normalized Earnings

At the end of 2007 before the credit crisis hit in earnest and many stocks (in hindsight) were over-valued, numerous bank stocks were trading for over 20 times earnings, including Synovus Financial (SNV), whose shares closed that year at $24.08, or 24 times annualized fourth-quarter 2007 earnings, according to SNL Financial. Since the consensus among analysts polled by Thomson Reuters is that the company will continue losing money through 2011, the best price-to-earnings multiple we can consider is one based on the consensus earnings projection of 31 cents a shares for 2012. Synovus Financial's shares closed at $2.15, or just 7.2 times that estimate.