In the mid-1980s to early 1990s, many banks were selling for less than book value.
During the recession of the early 90s, many banks had to be bailed out by the government due to some of the high-risk loans they had offered and due to the general downturn in the US real-estate market...remind you of today?
Apart from the top 10 to 20 largest banks, Wall Street analysts did not follow thrifts.
As a result, small and mid-sized shops were trading at inefficient prices, allowing value investors to purchase some companies at a large discount.
Some elements of valuing banks.
Many banks are "un-analysable", for example if they deal in junk-bonds or complex mortgage securities or other exotic lending instruments.
Conservatism is of the utmost importance when valuing companies in this industry, due to the fact that they are highly leveraged and thus already contain a certain amount of risk.
Book value is a good start for valuing a bank, but is usually a conservative estimate of what it is worth.
- Book value should be adjusted upward for understated assets such as appreciated investment securities, below-market leases, real estate carried below cost and a stable customer/deposit base.
- Investors must also be on the lookout for items that should be used to adjust book value downward, such as intangible assets, bad loans and poor investments that are carried at cost.
There are no sure things in this banking industry.
These factors play large roles in determining whether an investment will have a good outcome:
- asset quality,
- management discretion, and
- interest rate volatility
All investors can do is pick low-risk individual banks with the best prices to their fundamentals and hope for the best.