Price to book ratios: the value to watch while banks report earnings

By Robbie Citrino for Kapitall.

Price to book (P/B) ratios are one of the most important metrics to value investors. It is caluclated by dividing the current market cap of a company by its tangible assets—cash and capital. When a company has a P/B of 1 it is valued at the exact amount of its tangible assets.

Since the financial crisis, banks have been routinely valued at a P/B below 1 as investors, fearing new regulations and fines will inhibit banking’s growth in coming years, have scaled down their expectations for the sector. 

Read more about undervalued financial services stocks from Kapitall. 

These expectations, however, lead to a possible inefficiency in the market. If these five banks were to be dismantled today their shares would be worth more based on tangible assets alone than the market’s current valuation.
Screen Shot 2014-07-17 at 11.02.01 AM
Source: Yahoo! Finance

So what does that mean? In short, it means that if banks report earnings that beat the street’s expectations this week, these low prices could disappear fast. Do you think banking is undervalued? Use the list below to begin your analysis and let us know what you think in the comments. 

Click on the interactive chart to view data over time. 

 

1. Bank of America Corporation ( BAC): Provides banking and financial services to individuals, businesses, corporations, and governments in the United States and internationally. Market cap at $164.04B, most recent closing price at $15.60. 

P/B: .75

 

 

2. Morgan Stanley ( MS): Provides various financial products and services to corporations, governments, financial institutions, and individuals worldwide. Market cap at $63.1B, most recent closing price at $32.01. 

P/B: .98

 

 

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