In an article published on “The Motley Fool”, the author highlighted the three most expensive front-line bank stocks, Huntington Bancshares Incorporated (NASDAQ:HBAN), U.S. Bancorp (NYSE:USB) and Wells Fargo & Co (NYSE:WFC). The article focused on the concept that investment in big bank stocks doesn’t come cheap. Investors generally earn what they pay for when it I about investing in bank stocks.
If investors are looking to invest in leading banks, then they will have to buy these stocks at a premium to book value. Of all the leading bank stocks in the U.S., Huntington, Wells Fargo and US Bancorp are the most expensive bank stocks in terms of a valuation perspective. The price to book value is one of the most preferred common metric used by investors and professionals to reach fair valuation of a stock.
To estimate the price to book value ratio, the first thing required is a book value per share of the respective bank. Calculate equity by deducting liabilities from assets and then divide equity by outstanding share count to get book value per share. The current share price is divided by its book value a share to get the price-to-book-value ratio.
Generally, bank stocks move in a range of 0.5 to 2.5 times book value, based on their position in a business cycle. In simple terms, when the economy is strong, banks make good profits and therefore bank shares are comparatively expensive. However, when the economy is in downturn, valuations fall, and loan losses adversely affect earnings.
Banks that boast more than 2 times book value are classified as expensive. In US Bancorp’s case, the price-to-book value stands at 2.03. At the same time, Huntington Bancshares and Well Fargo trade for 56% and 76% premiums to book values, respectively.
In unrelated news, Huntington Bancshares Incorporated (NASDAQ:HBAN) reported that the company’s CFO and Senior Executive VP, Howell “Mac” McCullough will present at the upcoming Barclays Global Financial Services Conference.