Saturday, October 1, 2016

Singapore Banks: Part 4: Returns and Valuations


So far we've been looking at different aspects of the business separately.  All these parts operate together to generate a return.  How do we measure the returns generated?

The most common measure is ROE:

This doesn't account for differing leverage that different banks may have, so its used in conjunction with ROA:

ROA doesn't take into account the quality of assets.  To do this, we would look at Returns over Risk-Weighted-Assets:

Finally, we can use Revenue over Risk-Weighted-Assets, for cases where the banks have a lot of one-off expenses that affect their returns1:

Why the spike in OCBC's in 2012?  They had an one off $1.3bn sale of securities2.


We use book value to value banking stocks for two reasons.  Firstly, because earnings are highly cyclical.  Secondly, because for a financial business, accounting rules require the assets (i.e.: loans) on the balance sheet to be constantly updated to reflect future earnings3.

Specifically, we use Tangible Book Value (Book Value minus Intangible Assets):

How are the banks valued compared to the past?  I have to use simple book value to compare this, since I can't find any past P/TBV values4.  Price/BVs over recent downturns were:

                (Source: Share Investment: Ernest Lim: Singapore Banks Trading at near Global Financial Crisis Low Valuations).

Current Price/BVs are close to 1:


I would buy either UOB or OCBC, because of their historically high returns and lower write offs.

Would I buy now?  Banks stocks have been grinding lower for the last year.  They are fairly cheap, though not at crisis levels.  If I bought, I would only buy half a position now.  No telling when the next recession or crisis will come.

1 Not for these 3 S'pore banks, but may be used when comparing them to other countries' banks.
2 Note 7 in 2015 AR.   1.35bn "Disposal of securities classified as availiable-for-sale", which is 27% of PBT. 
3 Unlike other businesses where where the amount recorded on the balance sheet is the amount paid minus depreciation.
4 To calculate them I would need past stock prices un-adjusted for dividends/splits.