Extract of Warren Buffet’s interview on valuing banking stocks
Yes, well a bank that … earns 1.3% or 1.4% on assets is going to
end up selling above tangible book value. If it’s earning six-tenths of a
percent, or five-tenths of a percent on assets, it’s not going to sell
below. Book value is not key to evaluating banks. Earnings are key to
evaluating banks, and you earn on assets.
Now, it translates to book value, because it — to some extent,
because you’re required to hold a certain amount of tangible equity,
compared to the assets you have. But you’ve got banks like Wells Fargo
and USB, that earn very high returns on assets, and they sell at a good
price to tangible book.
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