So where are bank valuations in terms of the credit cycle? The following is a graph from a recent Tom Brown post: [click to enlarge]
As you can see, banks are close to the historic 25 year lows valuations. The big questions are:
- Is the book value stabilizing or even improving?
- Is that good quality book value?
- Are the banks well capitalized or will they need value-destroying new capital or a reorganization?
I hope to have already addressed the first question by showing how the industry profits have rebounded and how the supposedly next shoe to drop has been grossly exaggerated in its impact while the real culprit seems under control. Regarding the second and third questions - give me some time. We are only in part seven of the series.
What are the implications for investors? Well you can ask those three same questions for any specific bank. And if you can answer those positively, you probably have found an opportunity because most banks' multiples are at their lows. Here is a small sample with some large banks.
Disclosure: No position at the moment