# Does share price actually matter for banks?



## Guest116 (9 Oct 2008)

Is there a point where a banks share price gets so low that the bank goes belly up? Or does share price mean anything?


----------



## sfag (9 Oct 2008)

Yes it means the people who own the bank (ie those still holding shares) are losing money on their investment which in turn can mean the CEO will lose their jobs for not making them a profit.
Plus it means another bank can buy it cheap and move jobs and control elsewhere.


----------



## darag (9 Oct 2008)

In theory the price a company's shares trade at in secondary markets is not relevant for day-to-day operations.

Obviously if the intention is to participate in the market directly either by issuing new shares or buying back shares, then the price is relevant.

However the share price is significant in another way particularly for a company which needs to borrow; and borrowing (and lending) is fundamental in banking.

According to fundamental analysis, the market capitalization (price per share multiplied by the number of outstanding shares) should reflect the company's equity (excess of assets over liabilities) and the value of expected future profits.

A low share price implies that the market believes that the company's balance sheet is poor and/or that it does not expect the company to make future profits.  (Note the markets have a great record of being ahead of the game in this regard as we can see from the Irish stock prices; share prices were falling long before the reasons became apparent.)

This affects the cost of borrowing in the exact same way as it applies to individuals.  If the value of your assets/property/etc. is far more than that of your debts, then banks are far more likely to lend to you and at a lower rate.  They will also be favourably inclined even 'though you may not have much in the line of assets as long as you have a secure high paying job (the equivalent of expected future profits).

The converse also holds; if they suspect you have more debts than assets  and that you won't be able to earn any money going into the future, then lenders will be understandably reluctant to lend to you.

This is what happened to some of the Irish banks.  Their share prices were heading to zero (suggesting that their assets were insufficient to cover their liabilities and that they were not expected to make profits) so it's perfectly reasonable for other financial institutions to fear extending credit to them.

It's fair to say that if a bank can't borrow, then it won't last long as a business.

So in a long roundabout way, I guess my answer to your question is, yes.


----------



## Spondulicks (31 Jan 2009)

The share price is a measure of confidence, a rating on the management team, a judgement on the results, and a valuation of medium term profits(!) so I would say it matters alright.

Can you think of any other business that the leaders would be retained if they had reduced the value by a factor of between 8 and 12.


----------



## Duke of Marmalade (25 Feb 2009)

Today's Market Caps:

Paddy Power €515M
AIB €512M
BoI €301M
IL&P €263M

Something sick when the local bookies is worth more than the High Street bank or our biggest life insurance company. Maybe the sickness is a global one. Not so, as the following market caps from the UK show:

HSBC £60Bn
Lloyds £10Bn
Pru £7Bn
Ladbrokes £1Bn


----------

