Low valuations create buyers’ market for cash-rich private capital players

The impact and severity of COVID-19 remains unclear. Immediate measures taken by regulators globally have eased restrictions on liquidity and capital, however, revisions to loan loss provisions, maintenance of capital adequacy ratio and compressed net interest margins are just some of the immediate pressures confronting banks. Consequently, bank valuations dropped globally. At a regional level, North American and ASPAC banks are still trading at P/TBV equal to an average of 1.8x respectively, while European banks are currently trading at significant discount levels with average P/TBV at 0.8x as of November 2020.

COVID-19 did create uncertainty in the deal making market whilst buyers and sellers considered the impact on strategy and pricing. Some buyers chose to focus on shoring up internal operations while others-built scale to acquire distressed portfolios, pumped up deals. Going forward, we expect private equity will lead the way. More than US$1.5 trillion in dry powder remains and surplus cash may lead to stiffer competition and higher valuations in 2021.

P/TBV multiple (x) of the top banks, by region1,3

ASPAC banks5 | Looking at the ASPAC region, Indian banks hold sound valuation levels, trading at an average of 5.1x followed by Australian (1.6x) and Chinese banks (0.9x), as of November 2020. Banks in the region generally are well-capitalized. Asian banks have been preserving capital by pruning dividends or offering scrip options during COVID-19, allowing them to raise debt from yield-starved investors and further increase capital.

Source: KPMG analysis, Bloomberg (extracted as of 27th November 2020)
Average P/TBV on regional levels is 1.8x

European banks | European banks valuations remain dampened. Looking at the Europe region, top Nordic banks (especially from Sweden, Finland) have stronger valuations (average 1.2x implied P/TBV) compared to other players in major economies like the UK, Spain, France, Italy and Germany. Capital and risk positions continue to be key rating strengths for Nordic banks.

Source: KPMG analysis, Bloomberg (extracted as of 27th November 2020)
Average P/TBV on regional levels is 1.8x

North American banks | Top Canadian banks are trading at better P/TBV, at an average of 2.1x, compared to top US banks (average 1.7x), as of November 2020. In Canada, government relief efforts and loan deferrals by banks curbed an anticipated surge in delinquencies and impairments, with a simultaneous check on consumer-credit deterioration. Canadian banks are well capitalized, with a capital position well above regulatory requirements. The regulator has imposed a freeze on dividend increases and share buy-back programs. Going forward, however, top-line growth will remain a strong headwind, and, cost control and efficiency will play a key role in determining performance.

Source: KPMG analysis, Bloomberg (extracted as of 27th November 2020)
Average P/TBV on regional levels is 1.8x

Regression ROTE '21 — P/TBV2,4

A strong correlation between bank valuation and profitability is envisaged by the regression analysis. North American banks register higher valuations due to higher expected profitability (ROTE equal to 12.3 percent on average, compared to 8.5 percent and 7 percent in Asian and European banks, respectively). Higher profitability can also be partially explained by the different business model, with Investment Banking predominating in the US versus Commercial Banking in the EU. European banks are showing expected profitability lower than the cost of capital with ROTE equal to 7 percent compared to a cost of equity equal to 8-10 percent on average.

European banks, dot chart
North American banks, dot chart
ASPAC banks, dot chart


1 The price to tangible book value (PTBV) is a valuation ratio expressing the price of a security compared to its hard, or tangible, book value as reported in the company's balance sheet. The tangible book value number is equal to the company's total book value less than the value of any intangible assets

2 ROTE: Return on tangible equity (a version of ROE) is defined as net profit as a percentage of tangible equity (usually average tangible equity). Tangible equity is the equity value (or net assets) less intangible assets such as goodwill.

3 Top banks based on market capitalization as on 27 November 2020

For regression analysis, we have removed the outliers

ASPAC chart note: Housing Development Finance Corporation Limited (HDFC) founded in 1977, is a financial services company specialized in mortgage and based in Mumbai, India. ISIN: INE001A01036 4) HDFC Bank Limited, founded in 1994 is an Indian banking and financial services company headquartered in Mumbai, Maharashtra. ISIN: INE040A01034

6 All data have been extracted as on 27 November 2020

7 Source: Bloomberg, KPMG analysis