Sunday, May 6, 2012
GMO White Paper: Caveat Emptor: Capital Rules and Deleveraging Can Make "Bargain" Banks Expensive
The markets remain too sanguine about the valuations of banks in the face of macroeconomic adjustment, deleveraging, and the various capital, leverage, and liquidity rules that will come from round three of the Bank for International Settlements (BIS). That should translate into returns on equity that are likely to be sharply reduced in the future. This white paper shows how valuation is affected for a variety of factors including capital structure and leverage, and then applies those scenarios to the banks of various nations in the developed world. That translates into price to equity ratios that range from the slightly cheap to the oft-mentioned “fully valued,” which itself usually substitutes for "too high," even though price to book ratios appear to be at a substantial discount.