How to Answer “What valuation multiples would you use to value a bank and why?” in Investment Banking Interviews
“What valuation multiples would you use to value a bank and why?” is a common technical prompt in investment banking interviews, especially for FIG coverage. It tests whether you know the valuation multiples for banks that actually map to bank economics (capital, credit quality, and profitability) rather than forcing an industrial-company toolkit onto a regulated balance sheet.
A strong answer names the right multiples (and what they imply), explains why they work for banks, and adds the key adjustments and sanity checks you would use in practice.
What Interviewers Look For in Bank Valuation Multiples
Interviewers are checking whether you understand what makes banks different: interest-earning balance sheets, regulatory capital, and credit costs drive value more directly than operating margins and “normal” free cash flow. So they want you to choose multiples that align with shareholder returns and balance-sheet risk.
They’re also testing judgment: which multiple is most appropriate depends on business model (retail vs investment bank vs lender), profitability (ROE/ROTE), capital strength (e.g., CET1), and whether earnings are “clean” or distorted by one-offs, provisioning cycles, or trading volatility.
Finally, they’re assessing communication under pressure. The best answers are structured like a mini pitch: (1) lead with the core multiples, (2) explain drivers and adjustments, and (3) show how you’d triangulate to a range using bank valuation techniques and peer comps.
Bank Valuation Techniques: A Step-by-Step Answer Framework
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Step 1: Start with the two core bank multiples (and the intuition)
Lead with a direct answer: for most banks, the primary valuation multiples are P/E (or P/Adjusted Earnings) and Price-to-Book, typically P/TBV (tangible book). Then explain the intuition in one pass:
- P/E ratio works because banks’ earnings already incorporate the economics of leverage and funding costs, and cash flow concepts are less clean due to working-capital-like balance sheet movements.
- P/TBV works because book value is meaningful for regulated financial institutions: assets and liabilities are frequently marked closer to economic value than for industrials, and equity capital is the binding constraint that generates earnings.
Close the step by signalling you’ll pick the “lead” multiple based on what’s more stable and comparable for the specific bank (e.g., P/TBV anchored to ROE/ROTE for traditional lenders; P/E with normalised provisions for cycle-heavy lenders).
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Step 2: Connect multiples to value drivers (ROE/ROTE, growth, risk, capital)
Show you understand what drives dispersion in bank comps. The clean linkage is:
- P/TBV is largely a function of ROE (or ROTE) vs cost of equity, plus growth. Banks that sustainably earn ROE above their cost of equity typically trade above 1.0x TBV; those below often trade at discounts.
- P/E is driven by the quality and sustainability of earnings: net interest margin, fee mix, operating leverage, credit costs (provisions / cost of risk), and balance sheet growth.
Add bank-specific risk and capital considerations that affect the multiple you’re willing to pay:
- Credit quality (NPLs, coverage, underwriting, exposure concentrations) changes the “true” earnings power.
- Capital strength and buffers (e.g., CET1 vs requirements) affect payout capacity and downside risk.
- Accounting/one-offs (reserve releases, write-downs, trading marks) should be normalised so the multiple is comparable across peers.
This is where you demonstrate investment banking valuation methods: you’re not just quoting multiples—you’re tying them to bank fundamentals.
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Step 3: Specify the peer set and the adjustments you’d make in comps
Explain how you would make the multiples usable in a comps table. Start with a tight peer set by:
- Business model (retail/commercial lender vs universal bank vs investment bank-heavy)
- Geography and rate regime
- Funding profile (deposit franchise vs wholesale)
- Credit mix (prime vs subprime, consumer vs CRE)
Then call out practical adjustments:
- Use tangible book (P/TBV) to reduce noise from goodwill and past M&A.
- Use adjusted/normalised earnings for P/E: remove material one-offs, consider mid-cycle provisioning for lenders, and be careful with volatile trading/investment income.
- Ensure consistency on per-share metrics (dilution, buybacks) and timing (LTM vs forward NTM).
This demonstrates you can handle financial modeling interview questions that blend accounting reality with valuation—without overengineering.
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Step 4: Triangulate with secondary checks (where relevant) and sanity-test the output
Round out your answer with secondary tools that are “allowed” for banks but used thoughtfully:
- Dividend yield / payout-based checks: helpful when dividends are stable and capital return is a large part of the thesis.
- P/Deposits (selectively): can be relevant for deposit-rich retail banks, but only as a cross-check because deposit value depends on stickiness and margin.
- SOTP for complex groups: if a bank has meaningful insurance/asset management/investment banking segments, you may value pieces with appropriate sector multiples and add them up.
Then give 2–3 sanity checks an analyst would do:
- Does implied P/TBV line up with the bank’s sustainable ROTE vs cost of equity?
- Are you accidentally paying a low P/E that’s only “cheap” because provisions are temporarily low?
- Does implied valuation make sense versus capital position (e.g., CET1 buffers) and returns of capital?
Finish by stating you’d present a range (not a single point) and reconcile to the deal context (M&A control premium vs trading comps).
Valuation Multiples for Banks: Sample Analyst Answer
For banks, I’d primarily use P/E and Price-to-Tangible Book (P/TBV) because they map best to how banks create value. Banks are balance-sheet driven and regulated by capital, so traditional EV/EBITDA is less meaningful, while earnings and book value are directly tied to the equity base that generates returns.
In practice, P/TBV is my anchor for a traditional lender: it links cleanly to sustainable ROE/ROTE and growth—banks that can earn above their cost of equity typically trade above tangible book, and those below trade at discounts. P/E is also important, but I’d make sure it’s based on normalised earnings, especially adjusting for the credit cycle—provisions, reserve releases, or one-off items can make a bank look artificially cheap or expensive.
To apply the multiples, I’d build a peer set with similar business model, geography, funding mix, and asset quality, then compare LTM and forward multiples on a consistent basis. I’d also look at capital strength—like CET1 versus requirements—because excess capital supports buybacks and lowers downside risk, which can justify a higher multiple.
As cross-checks, I might reference dividend yield or payout metrics where capital returns are stable, and use SOTP if the bank has meaningful non-lending segments. Finally, I’d sanity-test the implied P/TBV against the bank’s sustainable ROTE and the assumptions embedded in credit costs and growth.
- Lead with P/E and P/TBV; don’t start with EV/EBITDA for banks.
- Explain the driver linkage: P/TBV ↔ ROE/ROTE vs cost of equity; P/E ↔ earnings sustainability.
- Use bank-specific adjustments: tangible book, normalised provisions, remove one-offs.
- Mention CET1 as part of valuation logic (payout capacity and risk buffer).
- End with triangulation and sanity checks rather than a single-point answer.
Common Pitfalls in Investment Banking Valuation Methods for Banks
- Using EV/EBITDA as the primary multiple without explaining why it breaks for banks’ leverage and interest expense.
- Ignoring tangible book and goodwill, which can distort comparability across acquisitive banks.
- Quoting P/E off headline earnings without normalising provisions, reserve releases, or trading marks.
- Picking an irrelevant peer set (different geography, funding mix, or credit book) and treating the resulting multiple as “market.”
- Not connecting multiples to drivers like ROE/ROTE, cost of equity, asset quality, and capital strength (e.g., CET1).
- Giving a single “best” multiple instead of explaining when you’d anchor to P/TBV vs P/E and how you’d cross-check.
Follow-Ups Seen in Financial Modeling Interview Questions (Banks)
Why is EV/EBITDA generally less useful for bank valuation?
Banks’ interest expense is part of core operations and leverage is intrinsic, so enterprise value concepts and EBITDA-style metrics don’t isolate operating performance the way they do for corporates.
When would you rely more on P/E than P/TBV?
If book value is less comparable or returns are driven by fee/trading income, I’d lean more on P/E—still using adjusted earnings and a peer set with similar volatility and mix.
How do you normalise earnings for a lender in comps?
I’d adjust for material one-offs and consider mid-cycle provisioning or through-the-cycle credit costs so the P/E reflects sustainable earnings power rather than a benign or stressed credit period.
How does CET1 influence the multiple you’d be willing to pay?
Higher CET1 buffers reduce solvency risk and can increase distributable capital (dividends/buybacks), supporting higher valuation multiples versus similarly profitable but thinly capitalised peers.
What quick sanity check links P/TBV to fundamentals?
Compare implied P/TBV to sustainable ROTE versus the cost of equity—if a bank earns meaningfully above its cost of equity, a premium to tangible book is more defensible.
How to Practise This in Investment Banking Interview Prep
- Build a 90-second version: “P/E + P/TBV, why they fit banks, and one adjustment + one sanity check.”
- Practise naming 3–4 value drivers that move bank multiples: ROTE, cost of risk, funding mix/NIM, and capital (CET1).
- Do two quick mock peer-set drills: one for a retail/commercial lender and one for a markets-heavy universal bank.
- Record yourself answering and remove filler; your goal is a clean, analyst-level explanation in ~2–3 minutes.
- On AceTheRound, rehearse this as a live prompt and ask for feedback specifically on structure, banking-specific nuance, and whether your “why” is explicit.
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