Does relative valuation work for banks?
Gianfranco Gianfrate and
Global Finance Journal, 2020, vol. 44, issue C
We study the distribution and properties of valuation errors yielded by banking industry multiples for European and U.S. banks. The results highlight that stock-market multiples are best suited for U.S. institutions, and that a two-year-forward P/E is the most precise metric. Contrary to practitioner beliefs, P/tangible book value is less meaningful than P/BV. Multiples are less accurate for small commercial banks than for large ones, and for investment banks than for retail banks. We investigate whether large positive errors lead to one-year positive price performances and negative errors to negative price changes, and find that the forward P/E loses its predictive ability in comparison with historical multiples. Testing three investment strategies, we find that bank multiples can be profitably used in portfolio choices.
Keywords: Banks; Relative valuation; Banking multiples; Equity valuation; Valuation errors (search for similar items in EconPapers)
JEL-codes: G11 G21 G32 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:44:y:2020:i:c:s1044028317304787
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