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Reevaluating Bank Price-to-Book Ratios: An In-Depth Analysis of Equity Components across Economic Cycles

Author

Listed:
  • Fernando García Martínez

    (Bank of Spain, 28014 Madrid, Spain)

  • Juan Domínguez Jiménez

    (Finance and Accounting Department, School of Business, Economics and Law, CUNEF Universidad—Campus Almansa, 28040 Madrid, Spain)

  • Ricardo Queralt Sánchez de las Matas

    (Quantitative Methods Department, School of Business, Economics and Law, CUNEF Universidad—Almansa, 28040 Madrid, Spain)

Abstract

This study explores the evolution of price-to-book (P/B) ratios among European banks from 2005 to 2020, a period where most banks in different countries had a P/B ratio below 1. By dissecting banks’ accounting equity into investor contributions and earnings-derived components, this research aims to evaluate how each component of equity affects these ratios and investigates whether their dynamics shifted during the period. We address a gap in prior research that has not extensively examined how individual equity components affect the overall P/B ratio. This aspect is crucial, especially in scenarios where the increase of specific components compensates for declines in others, thereby stabilizing total equity values. Our methodology involves regression analyses using a panel data model with random effects. The findings reveal that earnings-related equity components significantly influence P/B ratios. In contrast, investor contributions, which strengthen the solvency of the entity, appear to have a minimal impact. Additionally, our analysis highlights a significant quadratic relationship between the P/B ratios and both the profit or loss reported on Income Statements and distributed dividends.

Suggested Citation

  • Fernando García Martínez & Juan Domínguez Jiménez & Ricardo Queralt Sánchez de las Matas, 2024. "Reevaluating Bank Price-to-Book Ratios: An In-Depth Analysis of Equity Components across Economic Cycles," JRFM, MDPI, vol. 17(8), pages 1-21, August.
    • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:8:p:363-:d:1456908
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    References listed on IDEAS

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    3. Chen, Qianying & Katagiri, Mitsuru & Surti, Jay, 2022. "Monetary surprises and bank equity valuation with prolonged low interest rates," Finance Research Letters, Elsevier, vol. 47(PA).
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