Charting Banking VII: historic price to book
by PlanMaestro
So where are bank valuations in terms of the credit cycle. The following is a graph from a recent Tom Brown post:
As you can see bank’s 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 have 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 an 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.
No position at the moment
nice post Plan as always, thanks.
I have a question that I’d love your advice on… what are your thoughts on the AIG JAN 2014 options with a strike of 50 trading at $1.00? If book value is, say, $75 by the end of 2013 and we’re trading at 80% of book by then, that would indicate a share price of $60. $60-$50 strike = $10 on $1 investment (10-bagger). Am I crazy on thinking this is a decent risk/reward? What are your thoughts?
Mark, in one year and a half anything can happen, just watch Japan over the last 20 years. Do I think the risk/reward looks appealing? Yes. Would I put a substantial part of my port? No, especially considering the opportunity cost on being wrong on the timing (great opportunities out there). That is what I particularly like about the TARP warrants.
PlanMaestro, thank you for the prompt response. I do own a large chunk of the TARP warrants already and have been considering the addition of the LEAPS with a small portion of my portfolio. Thank you for your feedback.
Love your Twitter comments today. Um, hello people, Maiden Lane is empty! Good stuff
Thanks Mark …. but strange unrelated place to post that feedback hehehe