By Sam Theodore, Senior Consultant, Scope Group

In his latest The Wide Angle, Sam Theodore says investors and analysts should be asking questions about these topics on calls with top bank executives but they rarely do.

Over the last decade, the European banking sector has been a relative island of stability, defying the regular cadence of market warnings about the imminence of a new crisis. But prudential strength and respectable distance from crisis count for little in valuing European banks. Even if a few non-macro factors were considered, the sector’s image and valuation could be adjusted.

A properly supervised and generally risk-averse banking sector has a true cost of equity much lower than the double digits bandied about. This too challenges the market view that European banks are unable to earn their cost of capital, a perennial negative for their market valuations.

A bank’s value should be derived not only from traditional metrics like ROE – and specifically the extent to which ROE exceeds a foggily-defined cost of equity – but also by assessing the value that banks add in their customer relationships in areas such as safety, reliability, transparency, consistency over time, ease of access, cost and speed. And also the value banks add to a wide range of stakeholders, not just shareholders but society at large too.

As these factors evolve within what the BIS calls the Finternet (multiple interconnected financial ecosystems). the valuation metrics for banks and other financial actors will have to change dramatically. Which means that the analytical culture will have to evolve as well.

Read The Wide Angle here.