How we value Banks stocks
Model: P/B x ROE Regression
Estimates a fair price-to-book (P/B) multiple from how the market prices listed peer banks on their book value and returns. ROE, asset size, a bad-loan indicator and credit growth are weighed together to place this bank among its peers.
Why this model
A bank's free cash flow does not mean what it means for an ordinary company. Book value, ROE and asset quality give a better frame of reference for valuing a bank.
How it is calculated
A robust (Huber) multivariate regression estimates P/B from 3-year average ROE, log total assets, a bad-loan indicator and 3-year credit growth, after limiting extreme observations. Only banks the market prices on their earnings enter the fit (positive ROE, P/B at most 3.0×). The fitted P/B is multiplied by book value per share. A weak fit (R² below 0.4), a fit where higher ROE does not mean a higher P/B, and large state-owned banks use the peer median P/B adjusted for ROE.
Best suited to
Commercial banks where book value represents real economic assets and ROE reflects sustainable profitability.