When valuing financial service firms, the Price to Book Value (PBV) ratio is possibly the most commonly used valuation method by analysts because it's safe, simple, has a strong historical basis and requires no IQ at all.
Back testing the PBVs to stock price has a good correlation. PBV needs however be looked at in the context of return on equity (ROE). Historical analysis has shown that ROE has a strong impact on banks’ value creation in the long run. Bottom line: Firms that have high price-book value ratios should also have high returns on equity. Firms that have low price-book value ratios should have low returns on equity.
