How do I apply Gordon Growth Model (Bank Application) to bank stocks?

Estimate the bank's sustainable ROE. Use a normalized, through-cycle ROE that reflects long-term earning power rather than any single year's results. If a bank earned 14% ROE last year but its five-year average is 11%, the five-year average is usually more appropriate. For most US banks, sustainable ROE falls between 9% and 15% depending on the business model, asset quality, and capital structure. Banks with significant fee income or above-average net interest margins tend toward the upper end of this range. Determine the target payout ratio. Review the bank's historical dividend payout ratio, management guidance on capital returns, and any regulatory constraints on distributions. Most US banks target payout ratios between 30% and 50% of earnings, though some mature community banks pay out 40% to 60%. Calculate the retention ratio as 1 minus the payout ratio. A bank paying out 40% of earnings retains 60%. Calculate the sustainable growth rate: g = ROE x Retention Ratio. For example, a bank with 12% ROE and a 40% payout ratio has a sustainable growth rate of 12% x 60% = 7.2%. Sanity-check this result against long-term nominal GDP growth (typically 4% to 5%) and the bank's historical book value per share growth. If the calculated growth rate significantly exceeds nominal GDP growth, consider whether the ROE assumption is too optimistic or whether the bank can realistically sustain that growth rate indefinitely. Estimate the cost of equity using CAPM (Risk-Free Rate + Beta x Market Risk Premium) or a build-up method. For most banks, 10% to 13% is a reasonable range. The cost of equity must exceed the growth rate for the model to produce a valid result. If your estimated g is close to r, the denominator (r - g) becomes very small and the model will produce an unreliable, extremely high valuation. A spread of at least 2 to 3 percentage points between r and g generally produces stable estimates. Calculate the intrinsic value: P = D1 / (r - g). Compute D1 as the current annual dividend per share multiplied by (1 + g), or as projected EPS multiplied by the payout ratio. Compare the resulting intrinsic value to the current stock price to assess the margin of safety. Because the model is highly sensitive to small input changes, always run sensitivity analysis across a range of ROE, payout ratio, and cost of equity assumptions. Presenting results as a range (for example, $32 to $42) rather than a single point estimate is more honest and more useful for decision-making.

What are the strengths of using Gordon Growth Model (Bank Application)?

The formula is simple and connects directly to observable bank fundamentals: ROE, payout ratio, and cost of equity. No multi-year projections, terminal value calculations, or complex modeling spreadsheets are required. An investor can estimate fair value with a calculator and a few data points from a bank's most recent earnings report. The model makes the relationship between profitability and stock value explicit. It shows precisely how changes in ROE, payout ratio, and cost of equity affect fair value, making it well-suited for sensitivity analysis. An investor can quickly answer questions like 'what happens to fair value if ROE drops from 12% to 10%?' or 'how would a higher payout ratio change the valuation?' The sustainable growth rate formula (ROE x retention ratio) naturally incorporates the capital constraint that defines banking. A bank cannot grow its risk-weighted assets beyond what its capital ratios support without raising external equity or reducing capital below regulatory minimums. The model captures this real-world constraint without the investor needing to model capital requirements separately. Because the inputs are standardized and readily available, the model is efficient for screening large numbers of bank stocks. By calculating implied valuations across a peer group using consistent assumptions, an investor can quickly flag potential mispricings and focus deeper analysis on the most promising opportunities.

What are the limitations of Gordon Growth Model (Bank Application)?

Assumes dividends grow at a constant rate forever, which no bank actually achieves. Banks cycle through different credit environments, interest rate regimes, and strategic phases that cause earnings and growth to fluctuate materially from year to year. The constant-growth assumption works reasonably well for mature banks with long track records of stable fundamentals, but it oversimplifies reality for any bank in the middle of meaningful change. Valuations are extremely sensitive to the gap between the cost of equity (r) and the growth rate (g). Because the denominator is (r - g), small changes in either input produce large swings in estimated value. A bank valued with a 4% denominator (say, r of 11% and g of 7%) will see its estimated value jump by a third if the growth rate shifts to 8%, shrinking the denominator to 3%. The model's output should always be treated as an approximate range rather than a precise number. The model does not capture excess capital. A bank holding substantially more capital than it needs to support its growth rate has value beyond what the Gordon Growth Model reflects, because the excess can be returned to shareholders through special dividends, accelerated buybacks, or acquisitions. The Excess Capital Return Model addresses this gap directly and can be used alongside the Gordon Growth Model. The formula requires that g is less than r. Banks with very high ROE and high retention ratios may produce calculated sustainable growth rates that approach or exceed reasonable cost of equity estimates, making the model mathematically inapplicable. In practice, no bank can grow faster than the overall economy indefinitely, so the growth rate should be capped at or near long-term nominal GDP growth regardless of what the ROE x retention ratio calculation yields. The model assumes both the payout ratio and ROE remain constant. A bank currently paying 30% of earnings as dividends but planning to increase to 50% once it reaches its target capital level will follow a different valuation trajectory than the static model assumes. Similarly, a bank with temporarily elevated ROE due to unusually low credit losses will appear overvalued if that ROE is used as the sustainable input. For banks with changing fundamentals, a multi-stage Dividend Discount Model or Discounted Earnings Model handles these transitions more accurately.

Gordon Growth Model (Bank Application)

Q: What is the formula for Gordon Growth Model (Bank Application)?

The formula is: P = D1 / (r - g), where D1 = EPS x Payout Ratio x (1 + g), r = Cost of Equity, g = ROE x Retention Ratio. D1 is the expected dividend per share in the next period. It can be calculated two ways: by growing the current dividend at the sustainable growth rate (Current DPS x (1 + g)), or by multiplying projected earnings per share by the target payout ratio. Both approaches should produce similar results if the bank's payout policy is stable. The cost of equity (r) is the return investors require for holding the stock, reflecting the investment's risk. For banks, this is typically estimated at 10% to 13% using the Capital Asset Pricing Model (CAPM) or a build-up approach. Banks with higher risk profiles, including weaker asset quality, more volatile earnings, or smaller market capitalization, generally warrant a cost of equity toward the upper end of this range. The sustainable growth rate (g) equals ROE multiplied by the retention ratio (1 minus the payout ratio). This represents how fast book value per share grows through retained earnings alone. If a bank earns a 12% ROE and retains 60% of its earnings, book value grows at roughly 7.2% per year, and dividends can grow at the same pace without the bank needing to raise additional capital. Because the formula divides by (r - g), the growth rate must be lower than the cost of equity for the model to produce a positive, finite value. The smaller the gap between r and g, the higher the estimated value, which is why the model is so sensitive to these two inputs. The assumption that both r and g remain constant forever makes the formula equivalent to a perpetuity. This is a simplifying assumption rather than a literal prediction, and the model works best when current fundamentals reasonably approximate long-term averages.

Type: Intrinsic Value Method

Overview

The Gordon Growth Model is a formula for estimating what a bank stock should be worth. It takes the dividend a bank is expected to pay next year and divides it by the gap between the return investors demand and the rate dividends are expected to grow. A bigger dividend or faster growth means a higher estimated value. A higher required return means a lower one.

The model is also called the Gordon Dividend Discount Model or the constant-growth DDM. The formula is P = D1 / (r - g), where D1 is next year's expected dividend, r is the cost of equity, and g is the expected dividend growth rate. For banks, these inputs connect directly to fundamental banking metrics.

The sustainable growth rate equals Return on Equity (ROE) multiplied by the retention ratio, which is the share of earnings the bank keeps rather than paying out as dividends. The expected dividend equals projected earnings per share multiplied by the payout ratio. This direct connection to banking fundamentals is what makes the model so popular for bank valuation. A bank's profitability and capital return decisions feed straight into the formula without requiring complex multi-year forecasts, and the result is a closed-form estimate that works well for mature banks with stable dividend policies.

Formula

P = D1 / (r - g), where D1 = EPS x Payout Ratio x (1 + g), r = Cost of Equity, g = ROE x Retention Ratio

D1 is the expected dividend per share in the next period. It can be calculated two ways: by growing the current dividend at the sustainable growth rate (Current DPS x (1 + g)), or by multiplying projected earnings per share by the target payout ratio. Both approaches should produce similar results if the bank's payout policy is stable.

The cost of equity (r) is the return investors require for holding the stock, reflecting the investment's risk. For banks, this is typically estimated at 10% to 13% using the Capital Asset Pricing Model (CAPM) or a build-up approach. Banks with higher risk profiles, including weaker asset quality, more volatile earnings, or smaller market capitalization, generally warrant a cost of equity toward the upper end of this range.

The sustainable growth rate (g) equals ROE multiplied by the retention ratio (1 minus the payout ratio). This represents how fast book value per share grows through retained earnings alone. If a bank earns a 12% ROE and retains 60% of its earnings, book value grows at roughly 7.2% per year, and dividends can grow at the same pace without the bank needing to raise additional capital.

Because the formula divides by (r - g), the growth rate must be lower than the cost of equity for the model to produce a positive, finite value. The smaller the gap between r and g, the higher the estimated value, which is why the model is so sensitive to these two inputs. The assumption that both r and g remain constant forever makes the formula equivalent to a perpetuity. This is a simplifying assumption rather than a literal prediction, and the model works best when current fundamentals reasonably approximate long-term averages.

How to Apply

Estimate the bank's sustainable ROE. Use a normalized, through-cycle ROE that reflects long-term earning power rather than any single year's results. If a bank earned 14% ROE last year but its five-year average is 11%, the five-year average is usually more appropriate. For most US banks, sustainable ROE falls between 9% and 15% depending on the business model, asset quality, and capital structure. Banks with significant fee income or above-average net interest margins tend toward the upper end of this range.
Determine the target payout ratio. Review the bank's historical dividend payout ratio, management guidance on capital returns, and any regulatory constraints on distributions. Most US banks target payout ratios between 30% and 50% of earnings, though some mature community banks pay out 40% to 60%. Calculate the retention ratio as 1 minus the payout ratio. A bank paying out 40% of earnings retains 60%.
Calculate the sustainable growth rate: g = ROE x Retention Ratio. For example, a bank with 12% ROE and a 40% payout ratio has a sustainable growth rate of 12% x 60% = 7.2%. Sanity-check this result against long-term nominal GDP growth (typically 4% to 5%) and the bank's historical book value per share growth. If the calculated growth rate significantly exceeds nominal GDP growth, consider whether the ROE assumption is too optimistic or whether the bank can realistically sustain that growth rate indefinitely.
Estimate the cost of equity using CAPM (Risk-Free Rate + Beta x Market Risk Premium) or a build-up method. For most banks, 10% to 13% is a reasonable range. The cost of equity must exceed the growth rate for the model to produce a valid result. If your estimated g is close to r, the denominator (r - g) becomes very small and the model will produce an unreliable, extremely high valuation. A spread of at least 2 to 3 percentage points between r and g generally produces stable estimates.
Calculate the intrinsic value: P = D1 / (r - g). Compute D1 as the current annual dividend per share multiplied by (1 + g), or as projected EPS multiplied by the payout ratio. Compare the resulting intrinsic value to the current stock price to assess the margin of safety. Because the model is highly sensitive to small input changes, always run sensitivity analysis across a range of ROE, payout ratio, and cost of equity assumptions. Presenting results as a range (for example, $32 to $42) rather than a single point estimate is more honest and more useful for decision-making.

Example Calculation

Consider a regional bank with EPS of $3.50 that pays a $1.40 annual dividend, giving it a 40% payout ratio. The bank has sustained an ROE near 12% through multiple credit cycles, and management has indicated the payout ratio will remain around 40%.

Retention ratio = 60%. Sustainable growth rate = 12% x 60% = 7.2%. This growth rate is above long-term nominal GDP growth, so a more conservative estimate of 6% is also worth testing.

Using a cost of equity of 11% and the 7.2% growth rate: D1 = $1.40 x (1.072) = $1.50. Intrinsic value = $1.50 / (11% - 7.2%) = $1.50 / 3.8% = $39.47. If the stock trades at $33.00, the model suggests roughly 20% upside.

The sensitivity of the result matters. If the cost of equity is 12% instead of 11%, intrinsic value drops to $1.50 / 4.8% = $31.25, and the stock appears fairly valued rather than undervalued. If the growth rate is 6% instead of 7.2% with the original 11% cost of equity, D1 becomes $1.40 x 1.06 = $1.484, and intrinsic value = $1.484 / 5% = $29.68.

Changing a single input by one percentage point moves the estimated value by roughly $8 to $10, which underscores why the model should always be applied with a range of assumptions rather than a single scenario. An investor might reasonably conclude this stock is worth $30 to $40 depending on assumptions, and that range itself is useful information for deciding how to position.

Strengths

The formula is simple and connects directly to observable bank fundamentals: ROE, payout ratio, and cost of equity. No multi-year projections, terminal value calculations, or complex modeling spreadsheets are required. An investor can estimate fair value with a calculator and a few data points from a bank's most recent earnings report.
The model makes the relationship between profitability and stock value explicit. It shows precisely how changes in ROE, payout ratio, and cost of equity affect fair value, making it well-suited for sensitivity analysis. An investor can quickly answer questions like 'what happens to fair value if ROE drops from 12% to 10%?' or 'how would a higher payout ratio change the valuation?'
The sustainable growth rate formula (ROE x retention ratio) naturally incorporates the capital constraint that defines banking. A bank cannot grow its risk-weighted assets beyond what its capital ratios support without raising external equity or reducing capital below regulatory minimums. The model captures this real-world constraint without the investor needing to model capital requirements separately.
Because the inputs are standardized and readily available, the model is efficient for screening large numbers of bank stocks. By calculating implied valuations across a peer group using consistent assumptions, an investor can quickly flag potential mispricings and focus deeper analysis on the most promising opportunities.

Limitations

Assumes dividends grow at a constant rate forever, which no bank actually achieves. Banks cycle through different credit environments, interest rate regimes, and strategic phases that cause earnings and growth to fluctuate materially from year to year. The constant-growth assumption works reasonably well for mature banks with long track records of stable fundamentals, but it oversimplifies reality for any bank in the middle of meaningful change.
Valuations are extremely sensitive to the gap between the cost of equity (r) and the growth rate (g). Because the denominator is (r - g), small changes in either input produce large swings in estimated value. A bank valued with a 4% denominator (say, r of 11% and g of 7%) will see its estimated value jump by a third if the growth rate shifts to 8%, shrinking the denominator to 3%. The model's output should always be treated as an approximate range rather than a precise number.
The model does not capture excess capital. A bank holding substantially more capital than it needs to support its growth rate has value beyond what the Gordon Growth Model reflects, because the excess can be returned to shareholders through special dividends, accelerated buybacks, or acquisitions. The Excess Capital Return Model addresses this gap directly and can be used alongside the Gordon Growth Model.
The formula requires that g is less than r. Banks with very high ROE and high retention ratios may produce calculated sustainable growth rates that approach or exceed reasonable cost of equity estimates, making the model mathematically inapplicable. In practice, no bank can grow faster than the overall economy indefinitely, so the growth rate should be capped at or near long-term nominal GDP growth regardless of what the ROE x retention ratio calculation yields.
The model assumes both the payout ratio and ROE remain constant. A bank currently paying 30% of earnings as dividends but planning to increase to 50% once it reaches its target capital level will follow a different valuation trajectory than the static model assumes. Similarly, a bank with temporarily elevated ROE due to unusually low credit losses will appear overvalued if that ROE is used as the sustainable input. For banks with changing fundamentals, a multi-stage Dividend Discount Model or Discounted Earnings Model handles these transitions more accurately.

Bank-Specific Considerations

The Gordon Growth Model fits bank valuation more naturally than it fits most other industries. The reason is structural: the sustainable growth rate formula (ROE x retention ratio) maps directly to how banks actually accumulate equity and expand their balance sheets.

When a bank retains earnings, those retained earnings add to equity capital. That additional capital supports additional assets (loans and securities) through the bank's leverage structure. The new assets generate additional interest income, which flows through to earnings, which can then be partially retained again. This self-reinforcing cycle of retain-grow-earn is exactly what the Gordon Growth Model captures in a single formula.

Regulatory Capital and Growth Constraints

Regulatory capital requirements make the growth constraint in the model more than a theoretical concept. A bank cannot grow its risk-weighted assets beyond what its capital ratios allow. If a bank's Common Equity Tier 1 (CET1) ratio is near its target minimum, it can only grow assets by retaining earnings or raising new equity. The growth rate implied by ROE x retention ratio is effectively the maximum organic growth rate the bank can sustain without weakening its capital position.

Other industries can grow through debt financing, asset-light expansion, or operational leverage in ways that break the link between retained earnings and growth capacity. For banks, regulators enforce that link, which is why the model's core assumption holds more firmly here than almost anywhere else.

Connection to Justified Multiples

The Gordon Growth Model also provides the theoretical foundation for the justified price-to-book (P/B) and price-to-earnings (P/E) ratios used frequently in bank analysis. Rearranging the formula and substituting D1 = Book Value x ROE x Payout Ratio shows that:

Justified P/B = (ROE - g) / (r - g)

Justified P/E = Payout Ratio / (r - g)

These relationships explain why banks with higher ROE trade at higher P/B multiples, and why banks with a lower cost of equity or higher sustainable growth also command premium valuations. Understanding the Gordon Growth Model is effectively a prerequisite for understanding why bank multiples vary so widely across the industry.

Buybacks and Total Capital Return

One area where the standard model falls short for banks is in capturing share repurchases. Many banks, particularly larger ones, return significant capital through buybacks in addition to dividends. The pure Gordon Growth Model values only the dividend stream. When buybacks are a major component of capital return, investors can either adjust the payout ratio to reflect total capital return (dividends plus net buybacks as a share of earnings) or pair the Gordon Growth Model with the Excess Capital Return Model to value the excess capital separately.

When to Use This Method

The Gordon Growth Model works best for mature, stable banks with three characteristics: consistent ROE over multiple credit cycles, predictable dividend policies with limited year-to-year variation, and no significant near-term changes to earnings or capital structure. Large, well-established banks and consistently profitable community banks with long dividend track records are typical candidates.

The model is also well-suited for quick valuation estimates and sensitivity analysis during screening. When evaluating dozens of bank stocks, running the Gordon Growth Model calculation for each one using standardized assumptions quickly highlights which stocks appear cheap or expensive relative to their fundamentals.

The model is less appropriate for:

Banks in turnaround situations where current earnings do not reflect future potential

Banks with temporarily depressed or elevated ROE due to unusual credit conditions

Banks planning significant changes to their payout policy or capital structure

High-growth banks where the constant-growth assumption clearly breaks down

Banks that return capital primarily through buybacks, where the dividend alone understates total shareholder return

For these situations, a multi-stage Dividend Discount Model or a Discounted Earnings Model allows the analyst to explicitly model the transition from current to normalized fundamentals before applying a terminal growth rate.

Method Connections

The Gordon Growth Model is the single-stage special case of the Dividend Discount Model. Where a multi-stage DDM projects dividends year by year through a transition period and then applies a terminal value, the Gordon Growth Model assumes the terminal growth rate applies immediately. In practice, the Gordon Growth Model formula is frequently used as the terminal value calculation within multi-stage DDMs and Discounted Earnings Models.

The model directly underpins the ROE-P/B framework. Rearranging P = D1 / (r - g) and substituting the bank-specific definitions of D1 and g yields the justified P/B formula: (ROE - g) / (r - g). This means every P/B-based valuation of a bank implicitly makes Gordon Growth Model assumptions about ROE, growth, and cost of equity, whether the analyst recognizes it or not.

The Price-to-Book Valuation and Price-to-Earnings Valuation methods are closely connected because the Gordon Growth Model provides the theoretical justification for what multiple a bank deserves based on its fundamentals. The Excess Capital Return Model complements the Gordon Growth Model by separately valuing capital the bank holds above what its growth rate requires, addressing one of the model's known blind spots.

Common Mistakes

Using an Unrealistic Growth Rate

The most frequent error is plugging in a growth rate too close to the cost of equity. When g approaches r, the denominator (r - g) shrinks toward zero and the estimated value becomes unreliably large. A bank with 13% ROE and a 50% retention ratio produces a calculated growth rate of 6.5%. If the cost of equity is 10%, the denominator is only 3.5%. Shifting g up by just one percentage point to 7.5% cuts the denominator to 2.5% and increases the estimated value by 40%.

As a practical guardrail, the sustainable growth rate used in the model should generally not exceed long-term nominal GDP growth (typically 4% to 5%), regardless of what ROE x retention ratio produces. No bank can grow faster than the economy indefinitely. If the calculated growth rate exceeds this range, either ROE is above its long-run sustainable level or the payout ratio will eventually need to increase.

Using Trailing ROE Without Normalization

Using last year's ROE without assessing whether it represents long-term earning power is a common source of overvaluation or undervaluation. ROE is temporarily elevated when loan loss provisions are unusually low (as often happens early in an economic expansion), and temporarily depressed when provisions spike during downturns. A normalized, through-cycle ROE based on several years of data or adjusted for the current point in the credit cycle produces better inputs than any single year.

Presenting Point Estimates Without Sensitivity Ranges

Because the model's output changes substantially with small input adjustments, presenting a single intrinsic value estimate without a range overstates the model's precision. An investor who says 'the stock is worth $42' based on one set of assumptions is implying a level of certainty the model cannot deliver. Showing a range based on plausible inputs (for example, $35 to $45 under different cost of equity and growth assumptions) is more honest and more useful for investment decisions.

Overlooking Share Buybacks

The standard Gordon Growth Model only counts dividends as cash returned to shareholders. If a bank returns significant capital through share repurchases, the model captures only part of the total return. The growth rate partially accounts for buybacks (retained earnings that fund buybacks reduce share count and increase per-share growth), but for banks where buybacks represent a large share of capital return, using a total payout framework or pairing the model with the Excess Capital Return Model gives a more complete picture.

Across Bank Types

Large Banks and Money Center Institutions

The Gordon Growth Model works well for the largest banks because they tend to have stable, well-established dividend policies and relatively predictable ROE. These banks typically have payout ratios of 30% to 45% and sustainable ROE in the 10% to 15% range. Their cost of equity tends to fall at the lower end of the spectrum (10% to 11%) because of diversification, liquidity, and size, which narrows the r - g spread and makes the valuation more sensitive to input precision. Analysts should be especially careful with the growth rate and cost of equity estimates when applying the model to these institutions.

Regional Banks

Regional banks are often good candidates for the model, particularly those with consistent profitability and steady dividend histories. Payout ratios for regionals typically range from 30% to 50%, and sustainable ROE varies more widely (9% to 14%) depending on asset quality, fee income composition, and operating efficiency. One complication is that regionals pursuing active acquisition strategies may not fit the constant-growth assumption well, since acquisitions create lumpy earnings and unpredictable capital demands that the model does not handle.

Community Banks

Smaller community banks present a mixed picture. Those with long histories of stable earnings and dividends can be valued effectively with the Gordon Growth Model, especially banks in mature markets with limited organic growth ambitions. However, many community banks have irregular dividend policies that adjust based on capital needs or earnings fluctuations, less liquid stock, and ROE that varies more from year to year. The cost of equity for community banks is typically higher (12% to 14%) due to their smaller size and lower trading liquidity, which actually helps model stability by creating a wider r - g spread and making the output less sensitive to small input changes.

Banks Emphasizing Buybacks Over Dividends

Some banks, particularly larger ones with excess capital, return more to shareholders through share repurchases than through dividends. The standard Gordon Growth Model undervalues these banks because it captures only the dividend component of capital returns. For these institutions, the analyst can either adjust the model to use total payout (dividends plus net buybacks as a percentage of earnings) or combine the Gordon Growth Model with the Excess Capital Return Model to capture the full value of capital returns.

Related Valuation Methods

Dividend Discount Model — Values a bank stock by estimating what its future dividend payments are worth today, making it particularly applicable to banks with steady payout histories.
ROE-P/B Valuation Framework — A valuation framework that calculates what price-to-book multiple a bank deserves based on its return on equity, cost of equity, and growth rate.
Discounted Earnings Model — Estimates a bank's fair value by projecting its future earnings and calculating what those earnings are worth in today's dollars, adjusted for bank-specific factors like credit loss normalization and regulatory capital constraints
Price to Book Valuation — The most widely used method for valuing bank stocks, comparing what the market pays for a bank to what the bank is worth on paper.
Excess Capital Return Model — Values a bank by splitting its capital into two parts: what regulators require it to hold, and the extra capital above that minimum which could be returned to shareholders
Price to Earnings Valuation — A method for estimating what a bank stock should be worth by comparing its share price to the earnings it generates per share.

Related Metrics

Return on Equity (ROE) — Measures how much profit a bank earns for each dollar of shareholder equity. One of banking's most watched profitability metrics because it captures both operating performance and the effect of leverage in a single number.
Dividend Payout Ratio — Measures the percentage of a bank's earnings distributed to shareholders as dividends, indicating how much profit is returned versus retained to build capital.
Earnings Per Share (EPS) — How much profit a bank earns for each share of its stock, calculated by dividing net income by the number of shares outstanding.
Book Value Per Share (BVPS) — The accounting net asset value of a bank allocated to each share of common stock.
Price to Book (P/B) Ratio — Measures whether a bank's stock price is above or below the accounting value of its net assets.
Price to Earnings (P/E) Ratio — Measures how much investors pay for each dollar of a bank's earnings, offering a quick read on whether a stock's price looks reasonable relative to its profit.
Return on Tangible Common Equity (ROTCE) — Measures how much profit a bank earns relative to its tangible common equity, which strips out goodwill and other intangible assets from the equity base to show returns on hard capital

Frequently Asked Questions

How does the dividend discount model work for bank stocks?

The Gordon Growth Model is the simplest form of dividend discount model, estimating fair value from the expected dividend, cost of equity, and sustainable growth rate derived from ROE and retention ratio. Read more →

What is the relationship between ROE, payout ratio, and dividend growth?

The Gordon Growth Model makes this relationship explicit: sustainable dividend growth equals ROE times the retention ratio, directly linking profitability to dividend growth capacity. Read more →

What is the sustainable growth rate and how does it relate to bank dividends?

The sustainable growth rate is the core growth input in the Gordon Growth Model, calculated as ROE times the retention ratio, determining the maximum rate at which a bank can grow dividends without raising external capital. Read more →

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