Global Banks See Valuations Soar Amid Easing Rules

Global banks are entering a new era of strength, with market valuations hitting historic highs as they navigate a more favorable regulatory and earnings environment. After years of building resilience against low interest rates, the industry is showing renewed confidence.

According to the Boston Consulting Group, 53% of banks worldwide now have a price-to-book ratio (PBR) above one. This is a significant jump from four years ago when only 35% of banks cleared that same threshold.

"Over the past decade or so, the financial industry has taken a more cautious, inward-looking stance, focusing on productivity improvements and compliance," noted Saurabh Tripathi, global leader of financial institutions practice at Boston Consulting Group.

Following discussions at the World Economic Forum in Davos, Switzerland, Tripathi observed a clear shift in sentiment. "Leaders in the banking sector feel confident they can sustain high profitability over the medium term, supported by stable net interest margins and regulatory easing," he said.

Navigating a Shifting Rate Environment

For years, the banking sector has contended with the headwinds of low interest rates, a reality that set in after the 2008 financial crisis. The easy-money policies adopted during the COVID-19 pandemic were later reversed by central banks in the U.S. and Europe to combat inflation.

Now, a new phase is beginning. "Policy rates are now entering a downward phase," Tripathi explained, pointing to a trend that started around mid-2024. However, he anticipates that the resulting decline in banks' net interest income "is likely to be gradual," allowing banks to maintain strong profitability.

Deregulation Creates New Opportunities

A major tailwind for the sector is the push for financial deregulation, particularly from the Trump administration. In November, the U.S. Federal Deposit Insurance Corporation (FDIC) approved a final rule that eases capital standards for banks.

This rule aims to reduce the regulatory burden on major financial institutions compared to directives issued under the Biden administration, bringing U.S. standards more in line with international capital requirements.

Case Studies in Global Banking Success

The positive industry trend is reflected in the performance of individual banking giants in both the U.S. and Japan.

Wells Fargo's Remarkable Turnaround

Wells Fargo stands out as a prime example of a global bank improving its valuation. Around 2020, the group's PBR fell below 1, but it has since rebounded to approximately 2.

A key factor was the lifting of an enforcement action in June of last year, which had previously restricted the bank's asset growth due to past misconduct. With that restriction removed, Wells Fargo is free to pursue a growth-oriented strategy.

In a recent demonstration of its renewed capacity, Wells Fargo committed to a $29.5 billion loan as part of Netflix's $72 billion bid for Warner Bros. Discovery. This commitment represents the largest bridge facility of its kind for a single bank.

Japan's Banking Sector Rises

In Japan, leading institutions like Mitsubishi UFJ Financial Group have also seen their PBRs climb past the 1.0 mark, driven by the normalization of interest rates. The country's top banks are now on track to report record-breaking consolidated profits for the fiscal year ending in March.

This growth is further supported by policy changes. Japan's Financial Services Agency plans to ease rules that cap bank lending as a percentage of their capital. This move will empower banks to provide substantial, temporary funding for major corporate activities like acquisitions.