How to Value ASX Bank Stocks: CBA, WBC, ANZ, NAB

Why Banks Are Different to Value

Standard DCF analysis does not work for banks. Banks borrow money (deposits) and lend it (loans). "Free cash flow" in the traditional sense is meaningless — working capital IS the product. Capital requirements change what earnings are "free."

Value investors use a different toolkit for banks. Here is exactly what to look at.

The Right Framework

1. Price-to-Book (P/B) — The Primary Metric

For a bank, book value is the real book value of loans minus deposits — a meaningful number. Banks with exceptional returns on equity can trade above book; mediocre banks should not.

Historical guidance: P/B above 2.0 suggests you are paying a significant quality premium.

ASX Big Four — Price-to-Book Ratio vs 10-Year Average

2. Graham Number as Sanity Check

Even for banks, Graham Number provides a quick ceiling check:

Bank	Approx EPS	Approx BVPS	Graham Number	Price (~2025)	Premium
CBA	$5.95	$38.20	~$71	~$155	118% above
WBC	$1.90	$23.10	~$31	~$32	Near fair
ANZ	$2.45	$27.50	~$39	~$30	Discount
NAB	$2.50	$24.80	~$37	~$38	Near fair

CBA is trading at more than double its Graham Number — justified by its exceptional return on equity (~15%) but still a significant premium. WBC and ANZ offer more margin of safety on pure valuation metrics.

3. Dividend Yield Grossed Up (Franking Credits)

This is where Australian banks become genuinely compelling. All four pay fully franked dividends — one of the few remaining advantages Australian investors have over global peers.

Big Four — Cash Dividend Yield vs Grossed-Up Yield (30% tax rate)

Franking credit maths: For a $5.00 fully franked dividend at a 30% corporate tax rate, the franking credit is $5.00 × (30/70) = $2.14. Total grossed-up value: $7.14. This is the actual pre-tax equivalent the investor receives.

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DDM Valuation — CBA Example

CBA is essentially a dividend growth machine. DDM values it correctly:

Dividend (FY2025): ~$4.65 per share fully franked
Grossed-up dividend: ~$6.64
Dividend growth (5-yr avg): ~5%
Required return: 10%

DDM Value = $6.64 × 1.05 ÷ (0.10 − 0.05) = $139.44

At ~$155, CBA trades at a premium to DDM fair value — partly justified by its fortress market position (25%+ mortgage market share, extremely low default history) and investor demand for the highest-quality Australian bank.

Which Bank Offers Most Value?

Based purely on valuation metrics in mid-2025:

Most interesting: ANZ and WBC — trading near or below Graham Number, 8%+ grossed-up yields, and historically depressed P/B ratios relative to their own history.

Best quality, least value: CBA — undeniably the best-run bank in Australia, but the premium is extreme by global banking standards.

Middle ground: NAB — improving management execution, cleaner business mix post-MLC disposal, trading at a slight premium to fair value.

⚡ The pattern for ASX banks: buy WBC, ANZ, NAB at book value or below during banking stress events (royal commissions, credit concerns, rising defaults). Hold for the dividend grossed-up yield and wait for re-rating. Do not pay 3× book for CBA unless you have conviction it can sustain its exceptional ROE.

What Kills Bank Valuations

Rising bad debts (especially housing loan defaults in Australia)
APRA capital requirement increases (dilutes book value per share)
Net interest margin compression (RBA rate cuts hurting lending spreads)
Regulatory action — banking royal commission-style events

Monitor credit quality (NPL ratios) and capital adequacy ratios quarterly. A bank trading at book value with rising NPLs is not necessarily cheap.