In today’s time, especially when it comes to intermittent financial panics, in the world of banking each sectors stands out to it unpopularity because majority of the bank stocks are trading their stocks below the bank’s book value. The question is, what is the reason why every bank is terrified of bank stocks?
The tangible or actual book value of every company must, in any case and of the essence, state the value of everything which is tangible in the company. The things which one can get when the time comes for any liquidation in the company must state the tangible assets so as not to have a hard time liquidating it. In this purview, it may sometimes be odd whenever the stock market values of a certain company is lower compared to those which are stated in the tangible or actual book value. The reason here is that it is presumed that not only does the company not have any potential in its growth; it also implies that the designated theoretical sales price which the company has is too high.
Nowadays, only few big banks are selling in accordance with what is supposed to be done because most of the big banks across the world are selling, which have lower prices, below its tangible or actual book value. In about 27 years, Credit Suisse has even reached the lowest among its stock prices because of this. In the continent of Europe, several banks are even trading as much as 62 % of its tangible book value. In Goldman Sachs, Citigroup, Bank of America, or anywhere in the United States of America, banks are selling at a considerable and substantial discount when it comes to their book value. In India, almost all of its public sector banks are trading with other companies below the value of their books. These facts only show that the entire banking industry or entire investment world is really terrified of bank stocks. But, why? Are there any possible theories that can explain these results or conclusions? Well, there are a lot.
The Reason Why
Generally speaking, the main reason why almost everyone are afraid or terrified of bank stocks is that people do not or rarely think that these banks have the ability to make, garner, or accumulate money any time soon. The question now is, why the extremity of these sentiments? Why do they reach this level when it is in fact causing a result of global sell off?
The most prominent reason is because of oil. The prices in the oil industry declare lower prices which can only mean that a lot of energy companies experience downfall. It will also mean that tons of big banks which made a lot of loan agreements with other energy company may also experience downfall because it is closely linked with it. Investors do not even have any idea on how bad the damage can cause if there will be an ongoing oil rout.
Another reason is that the “yield curve” of each and every bank is not looking that good. This signifies that banks cannot make or perform its money lending processes as they used to. The irony of it is because banks normally make money primarily because they lend money to other people or industries.
In addition, another reason is the slow economic growth, especially in the emerging markets. This slow economic growth will cause a big turndown on the growth of any financial institutions and it will definitely incur big losses.
With all this said, there are still other people who are willing to take the risk and buy bank stocks merely because it is cheaper nowadays. Let us just wait and see the outcome of whether or not bank stocks should really be terrified upon.
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