What do we use to value commercial banks

As opposed to industrial companies and due to the nature of their business, banks are valued based on cash flows to shareholders only (in contrast to cash flows to shareholders and debt holders), as debt funding is directly correlated to the bank's assets and its profitability.

Banks tend to trade primarily based on Tangible Book Value (book value that would be available to shareholders in bankruptcy) and Earnings (P/TBV and P/E).

1. P/E – Because of the capital adequacy concerns mentioned above, banks are only able to dividend a limited amount of their earnings each period to equity holders, since they may have to retain some portion of their earnings in order to improve and/or maintain their capital position. Higher multiples are driven by higher quality (i.e., consistent) earnings
2. P/TBV - A representation of how many income producing assets a bank has. Higher multiples are driven by higher ROTCE ratios.
3. DCFs - While DCFs are rarely used to value banks, they can be applied to an estimation of future dividends (assuming a constant capital ratio) though this method is heavily dependent on cash flow and growth assumptions.