A:

The average price to earnings ratio (P/E) for banking firms, as of January 2015, is approximately 17.8. This compares with an overall market average P/E ratio of 35.25 – but this is a simple arithmetic average, skewed by the figures for a very small number of firms with P/E ratios over 100 or 200. A mean or median average would show the banking industry's average P/E ratio much closer to typical market performance. The best-performing regional banks, because of the larger potential for rapid growth, tend to have P/E ratios noticeably higher than those for the large, major banks.

The P/E ratio is one of the most widely used equity evaluation metrics by investors and analysts. It is simple to calculate. It results from dividing the current stock price by earnings per share (EPS), and it provides investors an assessment of a company in relation to the price that investors have to pay for the company's stock. It is thus not merely an evaluation of the company, but an evaluation of the company's stock at current price levels as well.

As with all equity valuation metrics, the P/E ratio as a standalone number is of limited usefulness for analysis. A company's P/E ratio is most important in terms of how it compares with similar firms in the same industry. For example, as of January 2015, Wells Fargo, perhaps the leading major bank in the United States, is trading with a P/E ratio of 13, while its competitor, Bank of America, currently has a P/E ratio of 10.

Higher P/E ratios are typically considered to indicate higher growth and increased revenue potential, or at least that investors are anticipating higher growth, since they are willing to pay a greater multiple of current earnings per share to obtain the company's stock. Analysts commonly interpret relatively lower P/E ratios as indicative of higher risk. Firms with lower reinvestment needs generally have higher P/E ratios.

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