Book value is a good proxy for the value of a banking stock.
Assuming the assets and liabilities closely approximate their reported value, the base value for a bank should be book value. For any premium above that, investors are paying for future growth and excess earnings.
Seldom do banks trade for less than book, but if they do, the bank's assets could be distressed.
Typically, big banks have traded in the two or three times book range over the past decade; regionals have often traded for less than that.
A solid bank trading at less than 2x book value is often worth a closer look. Remember, there is almost always a reason the bank is selling at a discount, so be sure you understood the risks.
On the other hand, some banks are worth 3x book value or more, but we would exercise caution before paying that much.
Bank stocks are volatile creatures, and you can find good values if you're patient - especially because even the best banks will generally be hit hard when any high-profile blowup occurs in the financial services sector.
Lying up several banks for a relative P/B valuation isn't as good as putting together a discounted cash flow model, but for this industry, it can be a reasonable approximation of the value of the business.
Related posts:
Hallmarks of Success for Banks
Hallmarks of Success for Banks: Strong Capital Base
Hallmarks of Success for Banks: ROE and ROA
Hallmarks of Success for Banks: Efficiency Ratios
Hallmarks of Success for Banks: Net Interest Margins
Hallmarks of Success for Banks: Strong Revenues
Hallmarks of Success for Banks: Price-to-Book
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