Musings on Markets: Good (Bad) Banks and Good (Bad) Investments: At the right price...
The article analyzes bank valuation using a Free Cash Flow to Equity (FCFE) model and explores how to differentiate between good and bad banks as investments by examining intrinsic value versus market pricing. The author argues that acquiring a good bank at too high a price results in a poor investment, while a bad bank at a bargain price can be superior, using Citibank as a case study of an undervalued quality bank versus JPMorgan Chase as an overpriced quality bank.
Metrics in this report
11.67%percent
Large commercial banks (implied from 25 largest banks sample)
1.12ratio
median
US banking sector aggregate, end of 2022
0.94ratio
median
US banking sector aggregate, May 2023
9.50%percent
average
Citibank, 5-year average (2018-2022)
8.78%percent
Citibank, 2022
12%percent
median
25 largest US banks by market cap, 2022
9.38%-14.80%percent
US banks, 2021 (50% of banks fall within this range)
9.24%-13.75%percent
US banks, 2022 (50% of banks fall within this range)
14.80%percent
Citibank, current
13-14%percent
aggregate
US banks collectively, post-2008 crisis
10-11%percent
aggregate
US banks collectively, years leading into 2008 crisis