So are global banks now looking cheap? Lex asks.
On an earnings basis, valuation multiples are near 20-year lows:
The trailing price/earnings ratio for the Datastream World Banks index is now 12.4 times. It has only been lower twice before: at the nadir of the last stock market crash at the end of 2002 and momentarily during the Russia/LTCM crisis of 1998. Some investment bank heads are insisting that today’s credit woes will only have a limited effect on earnings. So far, equity investors seem to be sceptical; after all, five months after LTCM blew up global bank earnings fell 20 per cent.
On a book value basis, the case for banks is even less compelling, the column notes.
The global sector’s price to book ratio is 2.1 times – only 10 per cent below its average for the past 10 years. There are also concerns about the robustness of capital bases. The expansion of assets, by bringing on to balance sheets both “stranded” leveraged loans and structured credit vehicles, may require more capital. It is also important not to underestimate the extent to which these assets might need to be impaired.
After the last bubble, bank shares began tumbling at the beginning of 2001. But it was not until March 2002 that absolute book values fell off a cliff, dropping by 25 per cent in a quarter. Only then did prices rally.
In other words, there’s worse to come.