The Valuation Divide: European Versus US Banks

When taking a closer look at the global banking sector, the valuation gap between the U.S. and European banking sector is hard to ignore - the "Big Four" U.S. banks are largely priced at a premium to book value, some of their largest European counterparts, namely BNP Paribas, Credit Agricole, Barclays, and Société Générale—continue to trade at a noticeable discount to their respective book values.

The simplest way to gauge the value of a bank is by its Price-to-Book (P/B) ratio, as well as its Return on Equity (RoE) when compared to its Cost of Equity. Here is how the banks compare based on our proprietary numbers:

European Banks

Bank Name	Ticker	Price to Book (P/B)	Cost of Equity	Return on Equity (RoE)
Société Générale	GLE	0.64x	15.00%	6.70%
BNP Paribas	BNP	0.78x	17.00%	9.00%
Credit Agricole	ACA	0.67x	15.00%	8.30%
Barclays	BARC	0.78x	16.00%	7.80%

U.S. Banks

Bank Name	Ticker	Price to Book (P/B)	Cost of Equity	Return on Equity (RoE)
JP Morgan Chase	JPM	2.30x	15.00%	16.00%
Bank of America	BAC	1.20x	17.00%	9.60%
Wells Fargo	WFC	1.28x	15.00%	11.20%
Citigroup	C	1.06x	16.00%	6.90%

JP Morgan (JPM) contends to stand out in terms of profitability, most of the other banks do not exhibit a large disparity in their respective RoEs, and apart from Wells Fargo (WFC), all the banks have a return on equity between 6.5-9.6% - consistently below their costs of equity. The differences lie within the P/B Ratios; Société Générale (GLE) and Citigroup (C) essentially have the same RoE, and yet GLE trades at 0.64x Price to Book while C is priced at 1.06x its book value. BNP Paribas (BNP) sits at a 22% discount to book, while Bank of America (BAC) is at a 20% premium, and both their Returns on Equity are around 9%.

This notable discount on European versus US banks can be allotted to a number of factors, first among them being the massive disparity in the liquidity driving these stock prices. The U.S. exchanges (NYSE/NASDAQ) benefit from an enormous flow of capital through single-stock purchases as well a ETF and mutual fund inflows that simply don't exist for Euronext or the London Stock Exchange at the same scale. The sheer volume in the U.S. supports consistently higher valuations, whereas European equities likely suffer from a "liquidity discount" due to a more fragmented exchange and regulatory frameworks.

The 2008 Financial Crisis also hit Europe with a unique brutality which led to a lasting erosion of investor trust. While U.S. banks were forced to "clean up" quickly under TARP, the European recovery was much slower and more painful due to its approach, as well as its structural differences. This left a permanent scar on the market’s perception, leading many institutional investors to treat European bank stocks as "untouchable" for nearly a decade. 

  This lack of trust led directly to differences in regulatory approach. Following the Crisis, the European Central Bank implemented a far more restrictive regulatory configuration compared to the U.S. Federal Reserve. These post-GFC rules - tight capital requirements and historical caps on dividends and buybacks - effectively turned these banks into "public utilities" in the eyes of investors, capping their upside regardless of their actual asset quality.

Though the "European bank discount" is justified in some respects, only some of the U.S. banks analyzed offer significantly higher Returns on Equity, namely JP Morgan and Wells Fargo, while a portion of the European banks, such as Société Générale and BNP Paribas can be bought at a significant discount to book, all while maintaining a very similar RoE with banks like Bank of America and Citigroup. Buying systemic, profitable banks at 20-30% discounts to book value may be one of the ways to acquire equities at relatively fair prices amidst the ongoing stock market boom of the last couple of years.

All the numbers presented in the article are taken directly from our dashboards.

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- The Intrival Team