Soundess, profitability, and growth. That's what it's all about in the banking business. When a bank makes a loan, that loan needs to be repaid. The interest from that loan (plus other fee income) needs to be enough to yield a reasonable profit higher than the bank's expenses. And the bank needs to grow to remain competitive and protect its market position.
But for investors, there's one more consideration: value.
Many investors use a general rule of thumb of buying a bank stock when the price-to-tangible book value is less than 0.5 times, and selling when it rises higher than two times. For me, that method is just way too oversimplified.
It sometimes makes sense to pay a premium for a bank stock that places a high value on credit culture and asset quality. These banks will survive and prosper, while others fall by the wayside. That security can be worth a premium. Likewise, a bank that relies heavily on leverage to achieve above average return on equity may not be worth the price, even if price-to-tangible book value is low. That risk may not justify even a healthy discount in price.
In the video below, Motley Fool contributor Jay Jenkins tackles this question for investors of BancorpSouth. Is the bank trading at a discount? And if not, is it justified to pay a premium for your shares? To find out, just click "play" below.