What Investors Want from North American Banks

Investors in recent years have put increasing pressure on North American banks to improve their valuations. While many banks have focused on improving returns, there are large disparities in valuation. For instance, a number of banks in the chart post a return on equity of around 13%, yet their stock price-to-book ratios fall between about .94 and 1.5. What accounts for the difference?

Clearly, some bank executives do a better job at convincing capital markets of their future profitable growth prospects. While private equity (PE) funds do not generally invest in North American banks, senior bank executives can draw lessons from how PE funds improve their portfolio companies in five areas:

• optimizing net interest margins, fees, and costs to improve profits sustainably;
• having leadership economics in properly defined markets;
• pricing and managing risk effectively while shaping a high-quality lending book;
• stabilizing the dividend policy; and
• developing a track record of execution and communicating a compelling equity story to investors.

Simply attaining a strong return on equity does little good if it’s squandered with investors. Bank executives who want higher valuations need to work on building investor confidence in their future profitable growth potential.