Financial Stocks Trading Near Book Value

It's not just Bear Stearns which is trading below book value. Here are some closing prices from Yahoo Finance:

Bank	Price/Book
Countrywide	0.19
Bear Stearns	0.73
Wachovia	0.74
Citigroup	0.93
JP Morgan Chase	1.06
Lehman Brothers	1.12
Bank of America	1.15
Morgan Stanley	1.44
Merrill Lynch	1.53
Goldman Sachs	1.60

Can someone explain to me why it makes sense for Merrill Lynch to be trading on twice the price-to-book ratio of Bear Stearns?

Disclosure: Author has no position in stocks mentioned.

Comments

[Andrew Horo...:]

FELIX!

Book value ratios are based on the value of the book. We are not sure how to value Bear's book/assets. More risk there.

By the way, why is there no disclosure of holdings included. You have written a few bullish posts on BSC. Position???

2008 Mar 14 08:53 AM

[Mick Weinstein:]

Disclosure added - author has no positions. Thanks for reminder, Andrew.

2008 Mar 14 09:25 AM

[indigo-alien:]

The market is telling us that there is a substantially greater risk of bankruptcy in BSC, than ML.

Simple really.

2008 Mar 14 09:30 AM

[phdinsuntan...:]

after almost 25 billion dollars of banks assets writedowns and credit losses declared by Merrill Lynch against a couple of billions by Bear Stearns drive us to share Felix concerns about the difference, did BSC all the writedown job or not? that is the rigth question, imo this is a crisis of solvency in leveraged institutions, I dont see how this inflationary monetary packages will solve anything, most of this repos games will end in long gold contracts and volatility.

2008 Mar 14 09:34 AM

[Dennis Lucey:]

As of this minute, BSC is trading for less than half of book!

Oh, wait...never mind.

2008 Mar 14 10:18 AM

[Lilguy:]

Price-to-book usually is valued at the company's stated book value or maybe an independent analyst's assessment.

None of that matters. What matters is how the company's counterparties see the book value and, more importantly, risk. If it looks bad, margins to up, liquidity shrinks, and insolvency follows--unless you can arrange for a bailout from your friends.

2008 Mar 14 10:23 AM

[DSX Lover:]

Never compare a Bank's Book Value with a Broker's book value. Its a totally different animal. Broker's are leveraged up to the WAAAZZZZOOOO almost as twice as Commercial Banks. Therefore look for higher fluctuations in the. In the other hand, the Book Value of the banks, is less volatile, along with the assets it holds. Banks are less subject to leverages than brokers, therefore less risky, and more stable. The business model of banks is more stable too, you can't predict what dislocations in credit securities will do to Brokers, because they are more leveraged, and because they don't have a stable depositor base like the banks, who will always have an insight on the cost of funds, and don't have to worry about MARGIN CALLS.

2008 Mar 14 11:06 AM

[Ames Tiedeman:]

Does anyone actually believe the "Book Value" metrics anymore? What happens to book value when it is revealed that the assets behind and holding up book value are hallow? I do not believe any book value figures from any financial company at the moment. How they may or may not be pricing a given asset is what makes book value. I do not trust the numbers. Neither should you. People told you BSC was sound 6 months ago. Look at it now. What was the Book Value of BSC in 2007? What is it now? Do you actually think the Book Value figures were correct back in 2007? Why? The stock is now down 75% in months...

2008 Mar 14 11:59 AM

[Stephen Ros...:]

Book values for Investment Houses are no longer believable. No one, even the I-
banks, know their true value. The only way at present that I can tell to differentiate the value of these stocks at the moment is how they have used their assets to deliver earnings. Currently the only ones of the above to meet that test are GS and JPM. Remember, when one of these I-Banks fall, GS and JPM will emerge ultimately winners as they lose competition and pick up the pieces.

2008 Mar 14 03:43 PM

[dckleins:]

Book values for financial companies are almost irrelevant. Book values have the most value the more tangible a company/industry's actual assets are...the more physical the better. I'm studying for the CFA right now, and they specifically say that book value comparable metrics shouldn't be used for financials. The biggest problem is that a bank's assets (primarily it's loan portfolio and investment portfolio) are essentially black boxes, and also that many of the assets are m-t-m so they're extremely susceptible to market perception.

2008 Mar 14 06:09 PM

[Robert DiAl...:]

I would make a bet that there is a deal on Monday or Tuesday. JP Morgan Chase Bear Stearns.....

2008 Mar 15 11:27 AM

[firboy4:]

I hope Stephen Rosenman is correct! I'd love to see GS pick up the pieces and lose competition. Thinning the herd. It seems that there are way too many people trying to make a living acting like they manage funds anyway.

2008 Mar 15 12:47 PM

[Andrew Hor...:]

dckleins: You are the winner! Bank's assets (primarily it's loan portfolio and investment portfolio) are essentially black boxes.. p/b is wrong metric in this case as it would be for REITS and other financials...truth is , in this case... nothing works as the lack of info put forth to insert in any ratio would not have been worth spit..

2008 Mar 15 03:19 PM

[supu:]

and idea how will this impact GS

2008 Mar 17 03:59 AM

[Oz-747:]

Also something to consider is that the book values themselves are deteriorating. Citigroup has about 50 billions left of subprime exposure. In Dec 31, 2007 the released a total shareholders equity of 113.6 billions and 5 bill shares outstanding. That gives $22.72 book value per share, it is trading now at about $18, so that is about .8 price/book. My reasoning is that the market is already pricing a deterioration of book values, Citi for example is pricing in a write down of 24 billions as of today. The guessing game is really, how bad is the damage? How much more will book values deteriorate.

2008 Mar 17 06:28 PM

[Oz-747:]

Tough to tell at this moment

2008 Mar 17 06:30 PM

[Oz-747:]

.

2008 Mar 17 06:31 PM