Good (Bad) Banks and Good (Bad) Investments: At the right price...
Following up on my last session, where I drew a contract between good and bed banks, in this one, I look at the contrast between a good banking investment and bad one, iwith banking pricing taking center stage. A good bank that you overpay for is a worse investment than a bad bank that you get at a bargain price. I look at intrinsic valuation in the context of a bank, arguing that you can only value equity (as opposed to operating assets or enterprise value) at a bank and then developing a model, based upon regulatory capital, to estimate free cash flows to equity. I also looking at pricing banks, noting the reasons why price to book ratios have deep roots in analyses, and compare banking price to book ratios across time and across the cross section. I close with a pricing of the 25 biggest US banks and disclose that I will be adding Citi, a bank trading at half its book value, a pricing discount that makes this stodgy, low growth bank into a good investment.
Slides: https://pages.stern.nyu.edu/~adamodar...
Valuation of Citi: https://pages.stern.nyu.edu/~adamodar...
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