Reevaluating Bank Price-to-Book Ratios: An In-Depth Analysis of Equity Components across Economic Cycles

Fernando García Martínez (), Juan Domínguez Jiménez and Ricardo Queralt Sánchez de las Matas
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Fernando García Martínez: Bank of Spain, 28014 Madrid, Spain
Juan Domínguez Jiménez: Finance and Accounting Department, School of Business, Economics and Law, CUNEF Universidad—Campus Almansa, 28040 Madrid, Spain
Ricardo Queralt Sánchez de las Matas: Quantitative Methods Department, School of Business, Economics and Law, CUNEF Universidad—Almansa, 28040 Madrid, Spain

JRFM, 2024, vol. 17, issue 8, 1-21

Abstract: This study explores the evolution of price-to-book (P/B) ratios among European banks from 2005 to 2020, a period where most banks in different countries had a P/B ratio below 1. By dissecting banks’ accounting equity into investor contributions and earnings-derived components, this research aims to evaluate how each component of equity affects these ratios and investigates whether their dynamics shifted during the period. We address a gap in prior research that has not extensively examined how individual equity components affect the overall P/B ratio. This aspect is crucial, especially in scenarios where the increase of specific components compensates for declines in others, thereby stabilizing total equity values. Our methodology involves regression analyses using a panel data model with random effects. The findings reveal that earnings-related equity components significantly influence P/B ratios. In contrast, investor contributions, which strengthen the solvency of the entity, appear to have a minimal impact. Additionally, our analysis highlights a significant quadratic relationship between the P/B ratios and both the profit or loss reported on Income Statements and distributed dividends.

Keywords: price-to-book ratios; equity components; regulatory capital; financial stability (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
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