How to value Banks properly?
There’s something very strange I came across while trying to value Banking stocks…
The Return on Assets (ROA) for all the Banks in the S&P 500 seems to be ridiculously low and in the 0% – 1% range over a 10 year average! Even the ROE is very low, <7%, and so are profit margins of EBIT to loans <1%…! Something is SERIOUSLY wrong with traditional valuation metrics because Banking salaries are often the most highly paid on average out of all industries and they are often envied for it!
So how is this even possible with such low profit margins and ROE??? Because I'm pretty sure if this happened in any other industry, such high salaries on non-existent profit margins would not be tolerated by shareholders.
I asked the same question to some people in other investing forums and even they don't seem to have any idea of valuing banking stocks, often choosing to avoid investing in Banks completely because the ridiculously low ROEs in their stock filters automatically disqualify them. I have seen some even claim that a declining "loans to deposits" ratio is a good sign of a profitable bank because they believe if the ratio was too high then there would not be enough deposits to cover non-performing loans…!
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