I’m not sure if that’s right. Book value has nothing to do with loan-book size.
What are the all the sources of revenue of a bank and what are all the sources of revenue for a Home Finance company?
I don’t understand what you’re getting at, but even if banks earn their revenues just the way NBFCs do, book value won’t matter unless you’re talking about a business that is on the road to liquidation.
I am a little confused by what I have read so far about valuating nbfcs. I will find out properly if I am right or wrong :p.
I believe P/B is a more better metric for valuing Banks and NBFCs.
Basically banks and NBFCs borrow money at cheaper rates and lend it at higher rates. Its a simple business. The loan book i.e. AUM is built by borrowings and owners equity. The borrowings are generally around 7-10 times of equity for a Bank/NBFC. The owners equity represents the book value. Therefore with the book value, we can have a ball-park of the AUM size of the company. With the AUM comes the ROA which will lead us to the profitability of the bank. All banks and NBFCs will have a similar leverage and similar range for cost of debt. Therefore with the book value we can get to profitability of a player on a ball park basis. Obviously it will differ for different types of lenders but it gives a good idea.
The price to book multiple will vary depending on the loan book quality, NIMs, cost to income ratio etc.
So price book is not the only measure to track but yes its a very good measure to track for lenders.
Price equity doesn’t take into consideration the AUM size, the leverage lender could have, the quality of the book etc. Its more straightforward metric though to give a better idea of quality of lender one has to and has to look at the Balance Sheet and hence price book is a much better metric though thats not the only metric one can rely for investment decisions.