Saturday, March 22, 2008

Historical Perspective on Financials Price to Book Ratio

Argus Research recently detailed the price to book ratio for the S&P Financials Index. The chart graphs the P/B ratio over the past 30-years. Argus notes:
"...The index now trades at about 1.3-times its reported book value, down from more than 2-times just last year and more than 3-times when the tech bubble burst several years ago. Granted, this credit cycle is different, and book value is difficult to measure because banks are still holding enormous amounts of difficult-to-value securities on their books. Financial stock bears note that once goodwill and other intangibles are removed from banks’ reported equity, their so-called “tangible” book values are much lower. As a result, these banks are still somewhat pricey on the basis of price to tangible book value. We remain cautious about major banks that still face losses on actual mortgage assets, not just on securities. But we think that the stocks of the major securities firms are looking attractive for those with a tolerance for risk. We believe that the Fed’s move to open the discount window to these companies, along with its decision to accept nonagency mortgage-backed securities as collateral in exchange for Treasuries, should calm the trading markets with time."
(click on chart for larger image)

S&P Financials Index Price to Book thirty year history chart
Are Financials Nearing a Bottom? ($)
Argus Research
March 20, 2008

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