Market valuation of Japanese banks

Abstract

The study explores into the market valuation of Japanese banks. A parallel study done by the investment researchers at Goldman Sachs, in the context of US banks, was known as 'Bank-Track, Emerging Trend for Bank Stock: The Supremacy of Equity'. Their research unearthed a new valuation rule which stipulates a bank's capital adequacy, reflected by its equity ratio, as the dominant tool for the valuation of the bank stocks. This finding inspired us to embark on a research to test the validity of this new valuation rule in the Japanese context. Based on a sample of 97 listed Japanese banks, equity ratios were regressed on the corresponding P/E ratios. However, the equity ratio is found to have no relation with the level of P/E ratio in the Japanese context. An equally important discovery is that valuation of regional banks is different from that of other bank categories. These findings imply that capital may not be a tool for the valuation of Japanese banks after all.