Value or Vanish: The Diverging Paths of North American Banks

Most banks talk up bright prospects, but how investors respond creates widely different outcomes in banks’ value signatures. Outperformers, shown on the right side of the chart, have a market capitalization much greater than their book value plus the net present value of expected future earnings. This resembles early valuations accorded some technology firms that promised future earnings and eventually achieved those earnings. The premium market valuation of these outperformers gives them flexibility to grow, acquire, and finance new ventures.

By contrast, investors discount the prospects of underperforming banks, such as those on the left side of the chart. For these institutions, pressure will grow for radical change, even the breakup of a bank, unless management takes actions such as deploying technology to further automation and digital interaction, shedding underperforming units, and adjusting operating costs.