This post is by Aswath Damodaran from Musings on Markets
In my last post, I looked at banking as a business, and used a simple banking framework to advance the notion that the key ingredient tying together the banks that have failed so far in 2023 is an absence of stickiness in deposits, created partially by depositor and deposit characteristics (older are stickier than younger) and partly by growth in deposits (high growth increases stickiness). I also used the banking framework to argue that good banks have stickier deposits, with a higher precent of these deposits being non-interest bearing, that they invest in loans and investment securities on which they earn interest rates that cover and exceed the default risk in these investments. While differentiating between good and bad banks can be straightforward, it does not follow that buying good banks and selling bad banks is a good investment strategy, since its success depends entirely on what the market is incorporating into stock prices. An investor who buys a good bank at too high a price, given its goodness, will underperform one who buys a bad bank at too low a price, given its badness. In this post, I will begin by looking at how to value banks and follow up with an examination of investor views of banking have changed, by looking at pricing, before examining divergences in how banks are priced in the market today.
The Intrinsic Value of Bank Equity
I am a dabbler in all things valuation-related, and I find the process fascinating, as (Read more...)