Bank valuation using multiples in US and Europe: an historical perspective

We investigate the performance of relative valuation for US and European banks over the period 1990- 2017. While the literature on the use of multiples is well developed, the relative valuation of financial institutions has received scant attention. We study the distribution and the main properties of each multiple’s valuation errors, assessing which multiples work best and should be preferred when valuing banks. Our results show that on average high levels of accuracy are achieved by two years forward P/E. Moreover, diluted earnings not including extraordinary items should be preferred when computing trailing earnings multiples and, interestingly, P/BV consistently outperforms P/TBV. Dividends’ multiples are not among the best performers, anyway, it is preferable to consider only common dividends when computing them. Most of the times P/Deposits and P/Revenues deliver poor performances, therefore it is advisable not to use them as main valuation approach.