Financials · Banks
Banks Sector Primer
A 44-page primer plus Excel model on bank equity valuation: P/TBV against ROTCE, CET1 headroom, net interest margin, credit discipline and screening.
2026 Edition · data as of June 2026
- pages
- 44
- sections
- 15
- model sheets
- 12
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The full primer
£25 / ~$32
- 44 pages, 15 sections
- Worked examples and applied cases
- 2026 Edition, data as of June 2026
Excel model
Valuation template
£45 / ~$58
- 12 sheets (.xlsx)
- Runs the primer's worked valuations live
PDF + Excel model Best value
Both files together
£59 / ~$76
- The 44-page primer
- The 12-sheet Excel model
- £70 bought separately · £11 less
Complete Financials Library
All three Financials industries: three primers, three Excel models (Banks, Insurance, and Alternative Asset Managers).
Inside the primer
The 15-section contents, a worked valuation page, and the Excel dashboard.
Contents
- 01 How Banks Make Money
- 02 Listed Bank Types
- 03 The Regulatory and Capital Ladder
- 04 Segments and Sub-Markets
- 05 Revenue Drivers: Worked Example
- 06 Cost Structure: Efficiency and Credit
- 07 Valuation Frameworks
- 08 Worked Example: Residual-Income Valuation
- 09 Worked Example: The Capital Walk
- 10 Banks Outside the United States
- 11 Applied Cases: ROTCE, P/TBV and NIM
- 12 Applied Cases: CET1, Efficiency and Credit
- 13 Key Metrics and Screening
- 14 Risks, Benchmarks and Case Study
- 15 Glossary and Cheat Sheet
Worked examples and applied cases · 44 pages · 15 sections · 3 worked banks
The Excel model
Educational material. This primer and its model are not investment advice or a recommendation to buy or sell any security, and they are not personalised. Worked valuations use illustrative calibrations, not fair-value estimates for any company.
Banks earn a spread on loans funded by deposits, plus fee income on top, and hold capital against the risk that borrowers do not repay. Tangible book value anchors the balance sheet, so equity investors price a bank on the return it can sustain on that book. Price-to-tangible-book-value follows return on tangible common equity: a bank compounding tangible book at a high sustainable rate earns a premium multiple, one compounding it slowly does not. Capital adequacy sets the ceiling on how much of that return reaches shareholders as dividends and buybacks, and net interest margin plus credit costs decide whether the return is sustainable at all.
Bank valuation benchmarks by sustainable return
The multiple of tangible book a bank earns follows the return it can repeat through a credit cycle. These are the primer's through-cycle reading bands, set beside the no-growth check at its 10.5% cost of equity.
| Sustainable ROTCE | Typical P/TBV | No-growth check (ROTCE / 10.5%) | How the market reads it |
|---|---|---|---|
| Below 8% | Below 0.9x | Below 0.76x | Discount, unless a recovery is priced |
| 8-12% | About 0.9-1.3x | 0.76-1.14x | Around tangible book |
| 12-16% | About 1.3-1.8x | 1.14-1.52x | Normal large-bank cluster |
| Above 16% | Above 1.5x; above 2.0x for quality | Above 1.52x | Franchise premium |
The bands sit at or above the no-growth check because a bank that earns more than its cost of equity compounds that excess on a growing book. The bands are through-cycle and illustrative, so the table teaches the relationship rather than calling anything cheap or dear. Three screens move a bank within its band. Capital: CET1 more than 2 percentage points above the firm's requirement is comfortable, within 0.5 points is tight. Cost: an efficiency ratio below 60% is good, above 65% is a cost take-out story. Credit: the FDIC insured-institution average net charge-off ratio of 0.62% for FY2025 is where a normalised credit line starts.
Worked example: a bank residual-income valuation
Take the primer's hypothetical money-centre bank: $260 billion of tangible common equity, $3,400 billion of earning assets, a 2.50% net interest margin, fees of 2.30% of assets, a 52% efficiency ratio, and a 0.55% cost of risk on loans worth 55% of earning assets. Tax is 24%, and 70% of earnings goes out in dividends and buybacks.
| Year-1 step | Amount |
|---|---|
| Net interest income (2.50% x $3,400B) | $85.0B |
| Plus fees (2.30% x $3,400B) | $78.2B |
| Less operating expense (52% of $163.2B revenue) | -$84.9B |
| Less provisions (0.55% x $1,870B of loans) | -$10.3B |
| Net income after 24% tax | $51.7B |
| Average tangible equity ($260B opening, $275.5B closing) | $267.8B |
| ROTCE | 19.3% |
| Residual income (net income less 10.5% of average equity) | $23.6B |
Year one earns $23.6 billion above the cost of equity. The primer carries the build for ten years with assets growing 4% a year, adds a terminal at a 15.5% steady-state ROTCE, and reaches an intrinsic value of $533.5 billion, or 2.05x opening tangible book. The one-line check, 19.3% divided by 10.5%, gives only 1.84x because it cannot see growth.
Now stress credit. At a 0.93% cost of risk, one and a half times the FDIC industry average, provisions rise to $17.4 billion, year-one net income falls to $46.3 billion and ROTCE to 17.3%. The one-line check drops to 1.65x, a tenth of the multiple gone on credit alone with margin and costs unchanged. The primer adds the full schedule, the capital walk in basis points of risk-weighted assets, and grids on margin, cost of equity and cost of risk; the Excel model runs the same build on your own bank.
Which bank valuation method fits which company
| Company type | Primary method | Check with | Why |
|---|---|---|---|
| Global systemically important (G-SIB) universal bank | P/TBV against sustainable ROTCE | CET1 headroom for buybacks | Franchise quality shows in the return on tangible book |
| Super-regional | ROTCE plus efficiency ratio | Net interest margin against deposit beta | Cost discipline is the edge |
| Regional commercial lender | Net interest margin and net charge-offs against the commercial property mix | CET1 against the Fed's annual requirement table | Spread and credit dominate |
| Restructuring bank | Tangible book per share build plus the ROTCE path | Delivery of the simplification plan | An option on recovery while ROTCE sits below the cost of equity |
| Bank reporting under IFRS | The same residual-income build | CET1 against its own regulator; IFRS 9 stage disclosures | Provision jumps can be stage migration, and capital ratios are national numbers |
What the full primer adds
The primer builds the tools in order: the listed bank types, the regulatory and capital ladder that sets minimum CET1, the segment and revenue build, then the efficiency ratio and credit-cost side of the cost structure. Two worked examples run a residual-income valuation and a full annual capital walk from first input to the resulting multiple, covering a money-centre bank, a super-regional and a bank still working through a cost turnaround, before applied cases on JPMorgan Chase, Bank of America, Wells Fargo, US Bancorp, PNC and Citigroup. Screening closes with P/TBV bands against sustainable ROTCE, CET1 headroom and the credit-cycle read.
Free guides on the site cover the individual pieces, so you can revise one idea without reopening the PDF: P/TBV vs ROTCE, net interest margin, CET1 and bank capital, the efficiency ratio and net charge-offs and the credit cycle. Research profiles for JPM, BAC, WFC, USB, PNC and C run the same screens on filed results. The companion Excel model spans twelve sheets, from three worked bank tabs through the capital walk and NIM and efficiency screens to a live sensitivity grid, so swapping in your own bank rebuilds the valuation from the capital walk up.
Sheets: Quick Start, Instructions, Assumptions, Bank 1, Bank 2, Bank 3, Valuation Summary, Capital Walk, NIM & Efficiency, Credit Cycle, Sensitivity, Dashboard.
Bank valuation: free guides
- P/TBV vs ROTCE: How Banks Are Actually Valued
- Net Interest Margin Explained
- CET1 and Bank Capital Ratios
- CET1 vs Tier 1 vs Total Capital: Which Binds
- Bank Efficiency Ratio: Reading Cost Discipline
- Net Charge-Offs and the Credit Cycle
- CET1 Requirements 2026: SCB and G-SIB Surcharges
- CET1 for European Banks: MDA Buffers vs the US
Bank valuation FAQ
- How do you value a bank?
- On tangible book value and the return the bank can sustain on it. A residual-income model forecasts earnings bottom-up, rolls tangible book forward, and values the profit earned above the cost of equity, plus a normalised terminal. Intrinsic value divided by opening tangible book gives the justified price-to-tangible-book (P/TBV). Price-to-earnings is a poor anchor because provisions swing reported earnings through the credit cycle.
- What is a normal P/TBV for a bank?
- It depends on sustainable return on tangible common equity (ROTCE). The primer's through-cycle bands run from below 0.9x for ROTCE under 8%, through about 0.9-1.3x at 8-12% and 1.3-1.8x at 12-16%, to above 1.5x beyond 16%, with quality franchises above 2.0x. Read the band for the ROTCE-to-multiple relationship, not as a cheap-or-dear call on a quoted multiple.
- What cost of equity is used to value a bank?
- The primer anchors on 10.5%, and argues sustainable ROTCE and cost of equity separately, defaulting neither. The choice matters: in its money-centre model, half a point on the cost of equity moves the justified multiple by roughly 0.14-0.17x. At steady state with no growth, P/TBV is simply sustainable ROTCE divided by the cost of equity.
- Why do some banks trade below tangible book?
- A bank whose sustainable ROTCE sits below its cost of equity destroys value on each dollar of tangible book it retains, so the identity puts it below 1.0x. It can still trade above that level when the market is pricing a recovery, such as a restructuring that rebuilds returns. The opposite trap is a trailing ROTCE from a low credit-cost year, which overstates the multiple a franchise has earned.
- What is CET1 headroom and why does it matter for valuation?
- It is the gap between a bank's common equity tier 1 ratio and its own total requirement: the 4.5% Basel III minimum, plus a stress capital buffer of at least 2.5%, plus any G-SIB surcharge. More than 2 percentage points of headroom leaves room for buybacks and dividends; within 0.5 points, distributions are at risk. The stress capital buffer resets each October, so headroom can shrink without any change in earnings.
See this methodology applied to a real company:
JPMorgan Chase (JPM) →