In this report we estimate the fair-value of the Price-to-Book ratio of 61 banks from around the world. We have constructed a non-linear model, based on four explanatory variables: the RoE, the Beta coefficient of each stock, the dividend payout ratio and home-country GDP growth rate. We didn’t pick these four explanatory variables by data-mining. There is a relatively simple but powerful finance theory that is closely related to these variables. In this special report we explain our model and the theory behind it.
Around 30 banks seem to be significantly over- or under-valued. For example, Lloyds seems to be overvalued while HSBC is undervalued, Mexican banks seem to be much more overvalued than banks in Peru, Colombia or Brazil; BCI Chile seems undervalued while Banco de Chile overvalued; Citizens Financial Group and Capital One Financial seem undervalued relative to US Bancorp, to name just a few.
Overweighting/buying what our model considers undervalued and underweighting/shorting what it considers overvalued may prove to be a good risk-reward strategy over the coming months.