Big techs versus big banks: Battle for the customer

By the end of 2019, cumulative market capitalization of the 200 largest banks only slightly exceeded that of the seven largest big tech companies, with both groups representing roughly $6 trillion of value. The disparity is not surprising, given the valuation ratios for the two groups: big techs traded with price-to-book ratios above 5.0 during 2019, while the banks had been stuck in the price-to-book range of 0.8 to 1.2 for much of the last decade, reflecting historical lows in return on equity as well as poor expectations for future growth and profitability.

In 2020, this valuation gap widened further. By the end of July, the market capitalization for the seven “biggest techs” exceeded $8 trillion dollars, almost double the market cap of the top 200 banks. Investors appear to be betting on “technology” versus “banking,” and reshaping the investment landscape in the process.

Part of the preference for big techs is explained by their improved performance in financial services (see examples in exhibit). It is also possible that investors see big tech firms as more resilient to the impact of COVID-19, and less vulnerable to crises in the global economy. Overall, investor demand is visibly higher for technology stocks, and “supply” is limited, resulting in an imbalance which impacts valuations.

While the current valuation gap may be tied to the current crisis environment, it may have long-term implications for both the big tech and banking industries. Where it fits in their strategic plans, some big techs are likely to continue moving into financial services; for example, through acquisitions or further investments in data and customer experience. For banks, the path forward seems clear: to play a meaningful role in the emerging cross-industrial digital ecosystems, they will need to accelerate their strategies for retaining and gaining customers.