IBD Interview Question: Why use P/E to value banks? Why is P/BV a better multiple than P/E for bank valuation?
The exact questions are: Why use P/E over EV/EBITDA to value banks? Why is P/BV a better multiple than P/E for bank valuation?
I'm not a bank or financials expert, but EBITDA excludes net interest. Net interest margin is what banks make money on, so you have to include that in your valuation. I would also assume that depreciation and amortization aren't significant for mature financial institutions either, but I could be wrong there.
As for the case of P/BV over P/E, my only guess (really, it's a guess, so hopefully others chime in here) is that you're valuing the net asset quality on a bank's books rather than their earnings power. Something along the lines of their total loans minus their total deposits - the P piece of P/BV is likely going to reflect loan quality (are they issuing junk bonds with high rates but many chargeoffs or are they loaning investment grade with low rates and few chargeoffs?).
Again, I'd wait for another to chime in, as financial institutions are not my specialty.
The poster above did a good job of describing what is actually (price)/(tangible book value)
I was going to write up my own summary but I'll link one of my favorite posts instead.
http://www.wallstreetoasis.com/forums/working-in-fig-financial-institut…
Yeah, that's quite a good write up. So, for OP's second question... are banks valued more on a comp basis when using tangible book value? I see they noted that they do use cash flows to shareholders only. Does that mean they'd start with net income rather than EBIT?
Use DDM or a linear regression from p/bv
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