Comments on Q3 results and valuation
I used the largest 10 EU banks’ data, nov.14 2011, to get an overview about the current state of this sector. The computer analysis results the following current valuation metrics for Eu banks:
1)The simplest method of valuation is Price to Book. The average current P/B=0.57, with high correlation 0.96. This is historic low, and a sharp 63% lower than the similarly below average US data at 0.93.
2)The Price to Earnings(ttm) current average is PE=6.9 for EU banks, with correlation 0.95. This is very low, 36% lower than the US bank’s average PE of 9.4.
3)Using Bookvalue and Earnings(ttm) we get the following best approximate equation: P=0.03*B+7.1*E
4)From the many valuation combination I found the the best approximation for bank share price in EU currently:
Price=6.4*Earnings+0.62*Dividend.
The correlations of both above parameters are high (0.97, 0.42) to the price. Apparently EU investors do not put much emphasis (0.62) on Dividend, especially compared to US (4.6). This might come from doubts on instability of the dividend. Actually, half of the big banks do not pay dividend. But those who pay, they pay relativly higher percentages (4% average).
Most bank’s price can be estimated with this Eq. confidently, within 10% of the actual price. The notable exemptions are ING, which is way undervalued, using any of the above equations, and HSBC which is slightly overvalued compared to others.
The conclusions for the EU banks in general, and ING in particular are:
... to be continued....