Moody’s Investors Service Inc. reiterated its June downgrade of the outlook for senior domestic bank debt Tuesday. This provides a good catalyst for assessing valuation levels in the sector – after all, the last thing investors need is to hold expensive stocks at a time when risks are rising.
The first task is to find the valuation metric that has best predicted forward bank stocks’ performance. Maddeningly, there’s only 10 years of valuation history to work with. But, a look at the four best candidates for most predictive bank valuation reveals that price to tangible book value is the best indicator for future sector performance.