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There may be good reasons for that. First, there are two ways to value companies, depending on what kind of companies they are. The two extremes are on one side a consulting firm, where the value is worth only the present value of the future fees to be earned by the consultants. But the company itself has no asset, very little debt, and its balance sheet is pretty much irrelevant to its valuation. The other extreme is an investment fund, where the company is worth exactly the current market value of its assets, it has no other future revenues other than the expected incomes from these assets. A bank is somewhere in the middle. It is kind of an investment fund in the sense that all its assets are financial assets that can be sold pretty much at their book value (unlike a factory where the book value may mean very little in term of how much the asset is really worth). But the book value may differ from the fair market value (that's often the case if there are bad loans). But part of the value will also be generated from profits that are unrelated to these assets: fees on payment processing, advisory fees, trading income, etc. So part of the value is also a PV of future revenues. And these future revenues may be negative. If you look at the past 10 years, banks have experienced huge revenue volatility. From trading losses, fraud (Kerviel style), fines (like UBS here), bad loans (RBS and HBOS style), etc. And then you can have all sort of weird technicalities. Like the book value may be increased for gains on own credit (if the company fair values part of its liabilities). That's a paper gain that the market is unlikely to give any credit for. |