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CFA Level I · CFA Level I Exam · Relative Value Equity Valuation Approaches

When valuing banks, analysts most likely favor price to book value over EV-based multiples mainly because:

Analysts favor price to book for banks because debt and deposits are operating inputs, which makes enterprise value and EBITDA hard to define. Equity-based multiples such as P/B and P/E therefore suit banks better than EV multiples.

  1. Abanks pay no dividends, which makes EV-based multiples zero
  2. Bbook value is always equal to market value for banks
  3. Cdebt is an operating input for banks, which makes enterprise value hard to defineCorrect

Explanation

For banks, deposits and borrowings are raw material for operations rather than a financing choice, so enterprise value and EBITDA are not meaningful. Equity-based multiples such as P/B and P/E are used. Banks do pay dividends, and book value does not always equal market value.

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