It's a tough time to be an ASX bank investor! These popular but embattled stocks are being pulled apart by bulls and bears trying to work out the right valuations for these shares.
The impending COVID-19 depression is turning the valuation exercise into nothing more than a guessing game.
It's the fog of war! No one knows how bad the economic implosion will be as the ranks of the unemployed swell around the world and loan defaults grow.
Perhaps the easier strategy is to buy the cheapest ASX bank stock instead of trying to pick the bottom.
Value is a defensive quality
We know that the COVID-19 pandemic will come to an end and the banking sector will rebound. Buying the best value bank stock will provide some downside protection as more bad news is reflected in the price, but yet will generate the best return when confidence returns.
That makes sense on paper. But the usual tools used to value ASX banks, such as dividend yield, have proven to be as credible as alchemy in this coronavirus climate!
Experts have increasingly turning to the price-to-book (P/BV) value multiple as a yardstick to value banks, and one bank in particular stands out as being very cheap.
Valuing ASX bank shares
Before I get into which bank this is, it's important to understand what P/BV is measuring. This multiple takes the market cap of a company and divides it by the firm's net assets, that is its total assets minus all its liabilities.
To put it in another way, it's the value that is left in the company after it sells all its assets and paid off its liabilities. The smaller the P/BV, the more value there is in the company. A multiple of under 1 is usually well regarded.
There is a reason why P/BV is favoured over the more commonly used price-earnings (P/E) multiple during times of extreme uncertainty. Working out the "E" for the next year in the midst of a crisis is too difficult.
While there are some variables you need to forecast for P/BV, it's a more conservative way to measure value when risks are high.
Throwing the book at the banks
Three of our four big banks are trading at around 0.8 times P/BV and that's encouraging for the bulls. These banks are Australia and New Zealand Banking GrpLtd (ASX: ANZ), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB).
Commonwealth Bank of Australia (ASX: CBA) is the exception with a P/BV over 1, but you have to pay a premium for quality, and CBA is clearly the best of the big four.
But if you want to buy deep value, UK-focused lender V MONEY UK/IDR UNRESTR (ASX: VUK) may be your answer.
Is this the most undervalued ASX bank stock?
The bank's P/BV multiple only stands at little more than 0.2 times, according to Macquarie Group Ltd (ASX: MQG).
This makes V Money, or better known as Virgin Money, cheaper than almost all of its UK peers too.
What's more, the broker believes V Money's balance sheet is more defensive than its UK competitors.
Macquarie is recommending the stock as "outperform" (which means "buy) with a 12-momth price target of $2.15 a share.
This suggests a near 50% upside to the stock's Friday closing price of $1.44. It's hard to imagine our big four banks generating that kind of return over the same period.
Another thing, you don't have to worry about V Money disappointing the market with a dividend cut or suspension. The stock doesn't pay a dividend and the market isn't pricing one in – at least not in the foreseeable future.
Who would have thought not ever paying a dividend would be seen as a defensive trait?
