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In the eurozone, banks’ market value is extremely low relative to the book value of their assets (their value-to-book ratio is very low). This may reflect one of two realities, either their market value is incorrect or their book value is incorrect. An observation of past developments in these two variables seems to show that the dominant mechanism is market undervaluation, not book overvaluation, according to analysts at Natixis.

See: The fall in banks’ equity market valuation is clearly excessive – Natixis

Key quotes

“The low valuation of eurozone banks may reflect one of two realities, either the market valuation is abnormally low, and investors have an abnormal aversion to banking risk or undervalue banks’ future profitability or banks’ book value (the value of their assets) is overestimated. Banks will suffer losses in the future that are not currently provisioned, and therefore not deducted from their book capital.”

“Let us first look at the link between eurozone banks’ market capitalisation and their earnings to see whether the banks’ valuation is abnormally low. We see that their market capitalisation has declined relative to earnings since 2010.”

“Let us next look at eurozone banks’ book value to see whether it has been revised downwards in the past after having been overestimated, in particular when banks have suffered losses. We see that banks’ book value was not revised downwards after the 2013-2016 peak in defaults (non-performing loans).”