Definition
Book Value of a Bank
The book value of a bank is its net worth, total assets minus liabilities, often viewed per share and adjusted for net NPAs to gauge underlying value.
Banks are commonly valued on price-to-book rather than price-to-earnings, because their assets and liabilities are largely financial and marked close to book. The price-to-book multiple a bank commands reflects its expected ROE relative to its cost of equity.
Analysts often compute adjusted book value by subtracting unprovided net NPAs from reported net worth, since those bad loans may erode capital. A bank trading below adjusted book value signals market doubts about asset quality or future returns.
Related terms
- Net NPA RatioThe Net NPA ratio is gross non-performing assets minus provisions held against them, expressed as a percentage of net advances.
- Price-to-Book (P/B) RatioThe P/B ratio compares a company's market price to its book value (net assets) per share, showing how much investors pay for each rupee of net worth.
- Return on Equity (ROE) for BanksFor a bank, Return on Equity is net profit as a percentage of average shareholders' equity, reflecting the return generated on the capital owners have invested.
- Adjusted Book ValueAdjusted book value is a bank's reported net worth reduced by its unprovided net NPAs and other expected losses, giving a more conservative measure of true equity.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.