Why Is PB Ratio More Relevant For Banks Than PE Ratio?

Published on December 16, 2025 | 4 min read

All the sectoral indices ended with gains, with Nifty PSU Bank being the top contributor, rising 1.09%. Image: Shutterstock

Every investor fundamentally analyzes a company before investing in a stock. Some investors prefer to analyze certain financial metrics instead of evaluating the company’s financial statement to get a quick idea of its financial performance.

You will see investors often talk about the P/E ratio of companies when analyzing their stock, but when analyzing banks, you need to evaluate a different metric: P/B Ratio.

Let’s understand what P/B and P/E ratios are and why P/B ratio is more relevant when analysing banks.

What Are the P/B Ratio and P/E Ratio?

The market price of a stock is a reflection of the investor's future growth expectations and perception. When investors have high confidence in a company, they buy its shares with hopes of capital appreciation and profits which leads to an increase in its price.

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Similarly, when investors are wary of a company's performance and future growth potential, they tend to sell their shares, resulting in a drop in stock price. Though the market price of a share is not an indicator of the company’s financial strength, it represents the investors' sentiments and confidence in the company.

P/E Ratio

The P/E ratio represents how much the investors are willing to pay to earn ₹1 of the company’s earnings. It is the ratio of the company’s current share price to its earnings per share.

P/E Ratio = Market Price of Share ÷ Earnings Per Share

For example, TCS Ltd earlier had an average P/E ratio of 32x. Meaning earlier investors were willing to pay ₹32 to earn ₹1 of the company’s earnings. This shows the investor’s perception of the company’s value and growth potential.

P/B Ratio

P/B Ratio is the ratio of the company’s current share price to its book value per share. Book value is also known as the net worth. It shows the amount of money investors are willing to invest in the net assets of the company.

Here’s how you can calculate the Book Value of a company:

Book Value = Total Assets - Total Liabilities

Once you have the book value of a company, find out its Book Value Per Share (BVPS). Here’s how you can calculate the book value of a share.

Book Value Per Share = (Total Shareholders’ Equity - Preferred Stock) ÷ Total Outstanding Shares

P/B Ratio = Market Price Per Share ÷ Book Value Per Share (BVPS)

P/B Ratio is often used to identify undervalued stocks with future growth potential. Typically, the P/B ratio of a share is greater than 1 as the market price of a share is more than its book value.

Why Is the P/B Ratio More Important When Analyzing Banks?

When planning to invest in a bank’s stock, you need to check its P/B ratio, as banking is an asset-heavy sector where a bank's asset quality matters more than just earnings. Here are some reasons why the P/B Ratio is more relevant when analyzing banking stocks.

Asset- Heavy Industry

Banks generate income by the interest earned on their assets, i.e, loans and investments. P/B represents how much the investors value these assets and provides a clear picture of their financials.

Asset Valuation

In case of a bank's assets, a mark-to-market accounting method is used to value its assets, such as securities and loans, at their current market price instead of their original price. This offers a more relevant reflection of the bank’s assets.

Financial Stability During Loss

When a bank isn’t profitable, it has no earnings and hence the P/E ratio cannot be used to analyse it. In such scenarios, the P/B ratio can be used to gauge investors’ perception of future value and gain insights into its asset quality, making it easier to identify undervalued banking shares.

Fund Utilization

P/B ratio represents the management’s ability to create a positive perception among the investors regarding the bank's future growth potential. It also shows the management's ability to utilise their assets efficiently.

IndusInd Bank Case 2025

In 2025, IndusInd Bank disclosed serious accounting irregularities related to its forex derivatives transactions. After revaluation adjustments, the bank's book value fell by ₹1,979 crore, which led its stock price to fall by 27% in a single day.

This incident not only created a negative market perception of the bank but also built distrust among the investors regarding the leadership.

Limitations of the P/B Ratio

For analyzing banking stocks, the P/B ratio is a primary metric, but it should be used along with the ROE (Return On Equity) Ratio for effective analysis. Return on equity shows how much profit a bank generates from the shareholders’ equity. A higher ROE signifies that the bank is using the shareholders’ money to earn profit.

A high P/B ratio along with an increased ROE indicates the good financial health of the bank and offers better insights regarding its future growth potential.

Different industries will have different financial metrics to fundamentally analyze their stock according to their business model. Since Banking is an asset-heavy sector, using the P/B ratio will offer better insights into its growth potential and financial well-being.

About Author

Mariyam Sara

Sub-Editor

holds an MBA in Finance and is a true Finance Fanatic. She writes extensively on all things finance whether it’s stock trading, personal finance, or insurance, chances are she’s covered it. When she’s not writing, she’s busy pursuing NISM certifications, experimenting with new baking recipes.

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About Upstox

Upstox is a leading Indian financial services company that offers online trading and investment services in stocks, commodities, currencies, mutual funds, and more. Founded in 2009 and headquartered in Mumbai, Upstox is backed by prominent investors including Ratan Tata, Tiger Global, and Kalaari Capital. It operates under RKSV Securities and is registered with SEBI, NSE, BSE, and other regulatory bodies, ensuring secure and compliant trading experiences.