Price-to-Earnings Multiples

By Sammon, Bill | Independent Banker, November 2006 | Go to article overview

Price-to-Earnings Multiples


Sammon, Bill, Independent Banker


Can bank valuations hold in a tough stock marketing environment?

In the public market for community bank stocks, most companies trade versus their price to earnings multiple. Some community banks are still trade versus their book value, but this is typically in the case where there are not enough earnings to trade off of. The goal for all publicly traded banks is to trade at price-to-earnings (P/E) multiples above their peer group. Community banks that trade at premiums have a greater ability to use their stock for acquisitions and a strong P/E multiple can also act as a deterrent from unwanted offers for the bank.

From a price-to-earnings standp oint, community banks continue to trade close to 10-year highs on multiples despite many macro trends that are adversely affecting the sector. For any bank that will need to tap the capital markets in the near future, these influences should be watched closely. Looking to the recent past will also reveal how negative influences can affect valuations.

A look at Chart 1 shows how community banks below $2.5 billion in assets have traded over the last 10 years. During that period banks have been valued as high as 17.8 times, earnings and as low as 11.4 times in the past decade. As you can see, the community bank sector saw a dramatic shift in multiples in the late 1990s and a number of factors played into that decline. Merger and acquisition activity was very strong and multiples in the community bank sector reflected this.

The jump in multiples from 1996 to 1997 reflects a market where there was much speculation on who would be the next community bank to go. As the M&A market cooled, bank stock multiples due to "take out" speculation pulled back. In addition to M&A activity, interest rates have had and will continue to have a dramatic effect on the entire sector.

The Fed's interest rate tightening in the late 1990s also had an effect on bank stock multiples. Historically, bank stock investors get nervous in a rising interest rate environment in anticipation of net interest margin pressure and potential hits to the securities portfolio.

Sector rotation can also play a role in where commu nity bank stocks are valued. Anyone who was an investor in 1998 and 1999 can remember looking at the tech stock market in amazement as huge paper gains were created on a daily basis. When this type of activity is taking place, it is difficult for a broker to get an investor excited about a bank with a 15 percent return on equity when millionaires are being created by listening to the next idea that hits the air waves of CNBC. The tech stock boom pulled significant dollars away from bank stocks and added to the downward trend in our sector.

Today, investors are struggling with these strong valuation levels in the face of a difficult operating environment, especially when no apparent catalyst is emerging that could propel bank stock valuation levels higher over the near-term. Anticipation that the Fed may end or pause its tightening cycle could provide a bounce for the community bank valuations over the near-term.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Price-to-Earnings Multiples
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.