The Motley Fool

Buffet’s Key to Bank Valuations

In a recent CNBC interview, Warren Buffet cited the direct impact that a bank’s return on assets (ROA) should have on the book value multiple (P/BV) at which it trades.  Basically, the higher the ROA, the higher the multiple.  Here’s the direct quote:

“…well, a bank that earns one — 1.3 or 1.4% on assets is going to end up selling above tangible book value.  If it’s earning 0.6% or 0.5% on assets it’s not going to sell. Book value is not key to valuing banks. Earnings are key to valuing banks.”

Buffet was referring to the valuation gap that exists between some of the large U.S. banks but let’s see if this logic holds true for the Canadian banks as well.


Return on Assets

Price to Tangible Book Value

Royal Bank (TSX:RY)



Bank of Nova Scotia (TSX:BNS)









Bank of Montreal (TSX:BMO)



Source:  Capital IQ

Foolish Takeaway

The distinct relationship that Buffet is referring to is not nearly as well illustrated by the Canadian banks because of the narrow ROA range that exists.  Based on these figures however, the valuations ascribed to Royal on the high side and BMO on the low appear slightly out-of-whack with the rest of the group.

The S&P/TSX Composite Index is loaded with resource and financial stocks.  Because of this, investors that rely on Canadian Index funds or ETFs severely lack diversification in their portfolio, opening them to undue risks.  We have created a special report that outlines an easy to implement strategy and 5 Canadian stocks that reduce the risks involved with passively investing in the Canadian market.  Click here now to receive “Buy These 5 Companies Instead of Following a Flawed Piece of Advice” – FREE!

Follow us on Twitter and Facebook for the latest in Foolish investing.

Fool contributor Iain Butler does not own shares in any of the companies mentioned at this time.  The Motley Fool has no positions in the stocks mentioned above.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.