Banking Health Parameters

In Focus – Price to Book Value Ratio
  • It is a financial ratio that is used to compare the market value of a stock to its book value.
  • It gives an idea about key attributes the market values most:
    • Adequacy of current capital and
    • Runway available to the entity for profitable growth.

How is P/B ratio calculated ?

P/B Ratio = market price per share / book value per share

What is RoE (Return on Equity ) ?

Return on equity (ROE) is a financial ratio that measures profitability and is calculated as net income divided by shareholders’ equity.

How is RoE calculated ?

RoE = Net Income / Shareholder’s Equity

What Does P/B Ratio mean ?

The P/B ratio measures the market’s valuation of a company relative to its book value.

  • P/B ratio above 1 indicates that the market believes that the company can grow and generate Return on Equity (RoE) above the hurdle rate that investors expect.
    • The faster it can grow or the greater the spread of the ROE above the hurdle rate, the greater the P/B multiple (above 1).
  • A P/BV below 1, on the other hand, indicates that the market either does not believe the bank has recognised all its bad loans or has the business model to deliver returns above the hurdle rate.
    • A lower P/B ratio could thus mean the stock is undervalued.
      • However, it could also mean something is fundamentally wrong with the company.
    • This may be because the bank does not have a good deposit franchise, has bad cost discipline or a broken lending model.
What is K Curve ?
  • It depicts the inequality existing between different financial entities in terms of their attributes that determine their future growth and profitability.
  • Widening of the arms of the ‘K’ would imply that the inequality is increasing, while narrowing of the span of the ‘K’ would mean the opposite.

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