How to Value a Bank Stock in 3 Simple Steps

How to Value a Bank Stock in 3 Simple Steps

Valuing a bank stock is often seen as complicated because banks do not behave like industrial or technology companies. Their balance sheets are dominated by financial assets and liabilities, earnings are heavily influenced by interest rates and credit cycles, and regulation adds another layer of complexity. Yet, despite these differences, any investor can arrive at a reasonable valuation in three straightforward steps that focus on the things that actually drive bank value: book value, earnings power, and risk.

Step 1: Understand and Adjust the Book Value (The Foundation)

The starting point for almost every bank valuation is tangible book value per share (TBVPS). Banks are leveraged balance-sheet businesses. When you buy a bank stock, you are essentially buying a portfolio of loans, securities, and deposits, plus a franchise that generates fee income and manages credit risk. Tangible book value strips out intangible assets (mostly goodwill from past acquisitions) and gives you the hard economic capital that belongs to common shareholders.

How to calculate it Tangible common equity = Total shareholders’ equity − Preferred stock − Goodwill − Other intangible assets − Deferred tax assets that depend on future profitability (in some jurisdictions)

Then divide by the number of shares outstanding.

Why tangible? Goodwill is only worth something if the bank can earn an attractive return on it forever. History shows that most bank acquisitions destroy value, so conservative investors treat goodwill as worth zero.

Adjustments most professionals make

  1. Mark-to-market the loan and securities portfolio. Accounting rules allow many loans to be held at amortized cost even when interest rates have moved dramatically. A bank trading at 1.5× book value in a rising-rate environment may actually be worth far less once you haircut the bond and loan portfolio to current market yields.
  2. Add back or subtract loan-loss reserves in excess of (or below) expected lifetime losses. During good times, banks often hold “excess” reserves; during crises, reserves are too low.
  3. Subtract accumulated other comprehensive income (AOCI) losses on available-for-sale securities if the bank has not opted into the AOCI filter (most large U.S. banks have). Unrealized losses sitting in AOCI are real economic losses that will hit capital when the securities mature or are sold.
  4. Add the present value of any large deferred tax assets that are realistic to use.

After these adjustments you arrive at “adjusted” or “economic” tangible book value. Many sophisticated bank investors will not pay more than 1.8–2.0× this adjusted number even for the highest-quality franchises, and often much less.

Example (simplified): JPMorgan Chase, Q3 2025 Reported tangible book value per share ≈ $90 Unrealized losses in securities portfolio (AOCI) ≈ –$30 billion After-tax impact ≈ –$7 per share Loan portfolio duration implies ~3–4% value loss from rate rise since 2021 ≈ –$4 per share Adjusted TBVPS ≈ $79–80

If the stock trades at $105, it is 1.31× adjusted book—reasonable but not screamingly cheap.

Step 2: Estimate Normalized Earnings Power (The Engine)

Book value tells you what the bank is worth if it were liquidated tomorrow. Earnings power tells you how fast (or slowly) that book value will compound over time. Banks have three main sources of profit:

  1. Net interest income (the spread business)
  2. Fee income (payments, wealth management, investment banking, etc.)
  3. Credit costs (loan-loss provisions)

Because earnings are cyclical, we need a normalized, through-cycle number.

Simple framework for normalized return on tangible equity (ROTE)

Historical average ROTE for U.S. banks 1990–2025 is roughly 10–12% after tax. Superb franchises (JPMorgan, Bank of America at their peaks) have achieved 15–18%. Weak or poorly managed banks often earn 5–8%.

To estimate normalized earnings today:

  1. Start with current net interest margin (NIM) and assume a normalized margin. In a 2–3% Fed funds environment (the long-term average), most banks earn 2.8–3.4% NIM. In 2025, with Fed funds at ~3.5%, many banks are printing 3.6–4.0%. We haircut the excess.
  2. Add realistic fee income growth. Payment volumes and wealth assets tend to grow with nominal GDP (4–6% long term).
  3. Assume through-cycle credit costs of 40–60 basis points of loans for a prime/super-regional franchise, 80–120 bps for credit-card-heavy or emerging-market lenders.
  4. Apply current efficiency ratio or assume modest improvement (top-tier banks run ~55%, average banks ~62%).
  5. Tax at the statutory rate (U.S. banks ≈ 23–25% effective).

A quick shortcut used by many analysts:

Normalized EPS ≈ Adjusted TBVPS × Normalized ROTE

If you believe a bank can compound tangible book at 12% indefinitely, then a fair multiple is roughly 1.5–1.7× adjusted book (rule of thumb: P/TBV ≈ ROTE / (Cost of equity − g)). With a 10% cost of equity and 3% long-term growth, 12% ROTE justifies ~1.33×; 15% ROTE justifies ~1.88×.

Example continued – JPMorgan Chase Adjusted TBVPS ≈ $80 Normalized ROTE 2026–2030: most sell-side analysts project 16–17% once rate volatility fades Implied fair value ≈ $80 × 1.75 = $140 (vs current price $105 in this hypothetical)

Step 3: Apply Risk Filters and a Margin of Safety (The Reality Check)

Even the most careful book-value and earnings analysis can be destroyed by one bad credit cycle or regulatory surprise. This step is where many investors skip, and why so many bank investments blow up.

Key risk filters:

  1. Funding quality
    • Loan-to-deposit ratio < 100% is comfortable
    • Uninsured deposits < 40–50% of total deposits for a regional bank
    • Little reliance on wholesale or brokered funds
  2. Asset sensitivity and interest-rate risk Banks that are heavily asset-sensitive (profits rise when rates go up) can get crushed when rates fall. Check the bank’s own interest-rate risk disclosure (Form 10-K, “Economic Value of Equity” sensitivity).
  3. Credit culture and concentration Avoid banks with heavy exposure to commercial real estate office loans, highly leveraged corporate lending, or geographies with bubble-like property prices in 2025 (parts of Sun Belt multifamily, data centers can be next).
  4. Capital buffers CET1 ratio well above regulatory minimum (good U.S. banks run 11–13% vs 7–8% minimum). Stress-test results matter.
  5. Management capital allocation track record Have they grown book value per share + dividends at >8–10% annually over 10+ years? If not, demand a much bigger discount.
  6. Regulatory and political risk In 2025, Basel III Endgame remains a live issue. Some banks will face 20–30% higher capital requirements. Avoid banks that barely meet current rules.

Final valuation synthesis (the “three-number” method many pros use)

  1. Liquidation value: Adjusted TBVPS × 0.8–1.0 (depending on asset quality)
  2. Normalized earnings value: Normalized EPS / 10% cost of equity (i.e., 10× normalized earnings)
  3. Franchise value: If the bank has a true moat (JPMorgan, Wells Fargo retail deposit dominance, etc.), add 20–40% premium

Then weight them according to conviction. A conservative investor might weight 70% liquidation, 25% earnings, 5% franchise. An aggressive growth-oriented bank investor might flip it.

Practical example – a mid-sized U.S. regional bank in 2025

Reported TBVPS: $45 Adjusted for CRE office marks and AOCI: $40 Normalized ROTE assumption: 11% (good but not elite) → Normalized EPS ≈ $4.40 Deposit franchise solid, no major credit blow-ups in 30 years

Valuation range: Low end (liquidation focus): $40 × 1.0 = $40 Base case: $4.40 × 11 multiple = $48.40, or $40 × 1.35 = $54 High end (franchise credit): $40 × 1.60 = $64

Fair value range $45–58. Buy aggressively below $45, add modestly $45–52, trim above $58.

Putting It All Together – Checklist You Can Use Today

  1. Book Value Step □ Pull tangible book value per share from latest quarter □ Subtract AOCI losses and goodwill □ Haircut securities and fixed-rate loans for rate moves □ Arrive at adjusted TBVPS
  2. Earnings Power Step □ Estimate normalized net interest margin in 2.5–3.5% Fed funds world □ Add fee income growing 4–6% forever □ Apply through-cycle credit costs (50–100 bps depending on mix) □ Target efficiency ratio 55–62% □ Compute normalized ROTE and EPS
  3. Risk & Margin of Safety Step □ Loan-to-deposit ratio <100%? □ Uninsured deposits reasonable?  No toxic concentrations?  CET1 ratio >11% and growing?  Management track record of >8–10% TBV + dividend growth?  Only pay up for true franchises; everything else trades around 1.0–1.3× adjusted book.

Master these three steps—clean book value, normalized earnings power, and rigorous risk filters—and you will value bank stocks better than the vast majority of professional investors. The beauty is that the math is simple; the discipline required to stay conservative during boom times is hard. The banks that look most expensive at the peak (trading 2–3× book with 20%+ ROTE) are usually the same ones that survive and compound for decades. The ones trading at apparent “bargains” of 0.6× book during crises often have hidden holes that wipe out shareholders.

Invest accordingly, and always with a margin of safety, and bank stocks can become one of the most rewarding asset classes over a full cycle.