A dynamic model of bank valuation

- We model the Price-to-Book ratio of bank equity in terms of fundamental variables.
- Deviations from long-run equilibrium indicate equity over- or undervaluation.
- We examine a panel of large and systemic US bank holding companies (BHCs).
- Equity valuation for these BHCs has a stable long-run relationship to fundamentals.
- There are substantial and persistent deviations of market from fundamental value.

We present a model of price-to-book (PB) valuation for banks that establishes a dynamic relationship between the PB valuation of equity and the cost of equity, expected growth of net income, and modified dividend payout ratio.