Malaysian Banking Sector (Sep 17)

One of the key finance principles: “A company that earns a return on equity in excess of its cost of equity capital has added value.” 

Read more: Cost Of Equity http://www.investopedia.com/walkthrough/corporate-finance/5/cost-capital/cost-equity.aspx#ixzz4sWnwaXVp

Thank my friend, James again for his effort in extracting the following info – a quick snapshot of the Malaysian banking sector:

Banks2.png

The following chart shows the significant relationship between price-to-book of banks and the difference between its return on equity and cost of equity:

Banks1.png

In a nutshell, if ROE is higher than COE, it is generally expected that the bank will trade at a higher price to book.

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