These FTSE 100 banks appear massively undervalued! Are they?

FTSE 100 banks trade at a discount to their American peers. That’s pretty clear. But are these markdowns warranted? Dr James Fox explores.

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Image source: Standard Chartered plc

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Banks are well represented on the FTSE 100. We have Barclays, HSBC, Lloyds, NatWest and Standard Chartered. These remain some of the biggest financial institutions in the world, but British banking industry market-cap is a fraction of the size it was prior to the financial crash.

Today, UK-listed banks tend to change hands with much cheaper valuation metrics than their US-listed peers. This isn’t unusual as the latter stocks tend to trade at a premium. But there are few places this premium is as large as the financial sector.

Undervalued on earnings

One of the most common valuation barometers is the price-to-earnings (P/E) metric. This is a financial ratio that compares a company’s current stock price to its earnings per share (EPS).

Investors and analysts use the P/E ratio as a tool to assess the relative value of a company’s stock. Higher ratios suggest a company is more expensive, and lower valuations suggest a company is cheaper.

Here’s how FTSE 100 banks compare with their US counterparts. As we can see, all five UK-listed banks trade at a substantial discount to these three chosen US-listed banks. This infers that UK banks are better value.

P/E Forward
Standard Chartered6
Bank of America8.2
Goldman Sachs13.9
JP Morgan8.8

Undervalued versus book value

Another useful metric is the price-to-book (P/B) valuation. This ratio compares a company’s current market price per share to its book value per share.

The P/B ratio is particularly valuable for investors who focus on the company’s balance sheet and asset base. A P/B ratio below one may suggest the stock is trading at a discount to its book value, indicating a potential undervaluation.

Here’s how FTSE 100 banks compare with their US counterparts on the P/B ratio. Once again, there’s a clear trend suggesting US banks are more expensive than their UK peers.

Standard Chartered0.51
Bank of America0.85
Goldman Sachs1.06
JP Morgan1.46

What about prospects?

Of course, stocks are also valued on their expected performance in the coming years, not just the year ahead or their asset values.

After all, a higher P/E often means investors expect more growth from the stock in question.

In the UK, analysts have registered their concerns about the impact of a severe economic downturn on credit defaults. This is undoubtedly weighing on the share prices of UK-focused banks like Barclays and Lloyds, even as these concerns become less worrisome.

While there are plenty of considerations, a useful metric which takes into account a company’s prospects and growth is the PEG ratio. This factors in both the P/E ratio and the expected earnings growth rate of a company.

The PEG ratio helps investors assess whether a stock is fairly valued, overvalued, or undervalued, based on its earnings growth expectations.

A PEG ratio below one may indicate that the stock is undervalued, considering its growth potential.

PEG Forward
Standard Chartered0.83
Bank of America1.44
Goldman Sachs1.72
JP Morgan1.76

Once again, the data suggests US companies are more expensive than their British peers. This is the type of data that informs my investment decisions.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. James Fox has positions in Barclays Plc, Lloyds Banking Group Plc, NatWest Group, and Standard Chartered Plc. The Motley Fool UK has recommended Barclays Plc, HSBC Holdings, Lloyds Banking Group Plc, and Standard Chartered Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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