NEW YORK (
) -- Shares of the largest banks in the U.S., including
have seen a dramatic change since 2007.
senior vice president of equity research spoke with
regarding how analysts have altered the way they valuate bank stocks over the past two years.
How have you changed the way you valuate bank stocks?
-- The core way doesn't change, but it does change from period to period. There are three metrics and the first is loan quality.
If the quality of the loan portfolio is eroding the stock is going to do poorly. When you aren't worried about the quality of the loan portfolio, then you are looking at changes in interest rates. Finally, when those aren't in question then you look at earnings.
What you are always keying on is the book value of a bank. That is why loan quality is the most important and interest rates can also swing book value. They change the value of the financial instruments by increasing interest rates. It depends upon where you are in the cycle.
How have other analysts changed the way they valuate companies since 2008?
-- In the short run,
analysts attitudes changed dramatically in 2008. They were looking at tangible book value. That in my view was the poorest way to look at a book value.
Then when they decided the banks were not going out of business, they were looking at who had the lowest loan portfolio and decided those would be the banks that would recover the quickest. If you took the 10 lousiest banks and compared them to the top 50, you see a big difference in investments because investors figured there would be a major change in loan loss provision.
Now in the last three months it has changed again. Everyone is looking at core earnings and they are discouraged that the banks are not showing an improvement in core earnings at this time. That didn't happen in the second quarter because all of these guys out there were working the concept.
Three months from now that will be out the window. We will be focusing on mergers and acquisitions because there will be an explosion of M&A in banking once these capital rules are put in place.
Why will the M&A climate change how analysts value a company?
-- I've gone back to emphasizing book value all over again. This M&A wave is going to be based on selling at book value, and you take a company at
; it makes an it creates an immediate increase in earnings.
Do you anticipate using that method going forward?
-- I'm not going to change the way I valuate banks. There is a core value that is what I believe in.
Written by Maria Woehr in New York