Post by candy188 on Dec 6, 2013 17:35:27 GMT 7
Two Key Numbers to Understand Banks
By Ser Jing Chong - December 5, 2013
the local banks, comprising of DBS Group Holdings (SGX: D05), Oversea-Chinese Banking Corporation (SGX: O39), and United Overseas Bank (SGX: U11), have a giant presence in our stock market.
For instance, the three banks combined, make up almost one-third of the market-capitalisation-weighted Straits Times Index (SGX: ^STI) due to their giant market values that range from S$33b to S$42b.
Because of the banks’ importance to investors, who inadvertently wind up with large chunks of the financial institutions even if they’re invested in a simple index tracker like the Nikko AM Singapore STI ETF (SGX: G3B) or SPDR Straits Times Index ETF (SGX: ES3), it might be worthwhile to take a closer look at them from an investor’s point of view.
there are certain key metrics that you can still focus on to gain a better investor’s perspective on banks.
Here are a couple:
1. Price to Tangible Book Value
My American colleague, Patrick Morris, calls tangible book value “the essential valuation metric for banks.” Just like the more ubiquitous Price to Earnings ratio, the higher the PTBV ratio is, the more expensive a bank is.
The book value of any company, including a bank, is calculated by subtracting all its liabilities from its assets. With a bank, we’ll like to go one step further and take away all the intangibles – assets that are not represented by real capital that accrue to common shareholders.
Mathematically, it’s represented as:
TBV = Total Equity – Minority Interests – Goodwill & Intangibles – Preferred Equity
2. Return on Asset
This metric measures how profitably a bank manages its assets. It ties in intimately to the PTBV ratio as the ROA of a bank gives us a gauge on how much premium the market would likely place upon a bank’s assets.
Here’s what American billionaire investor Warren Buffett – a keen investor in American banks – has to say on the topic:
“A bank that earns 1.3% or 1.4% on assets is going to end up selling above tangible book value. If it’s earning 0.6% or 0.5% on asset it’s not going to sell. Book value is not key to valuing banks. Earnings are key to valuing banks.”
Foolish Bottom Line
So there you go, two metrics that can provide you with a better perspective on banks from an investor’s point of view. Do note, however, that this is just the beginning. Any investment in a bank would likely require a much deeper dive.
And in any case, investing is More ART than science – there are NO Secret Formulas or Magic Numbers that can point to Instant success. There’s much more to do.
www.fool.sg/2013/12/05/two-key-numbers-to-understand-banks/
By Ser Jing Chong - December 5, 2013
the local banks, comprising of DBS Group Holdings (SGX: D05), Oversea-Chinese Banking Corporation (SGX: O39), and United Overseas Bank (SGX: U11), have a giant presence in our stock market.
For instance, the three banks combined, make up almost one-third of the market-capitalisation-weighted Straits Times Index (SGX: ^STI) due to their giant market values that range from S$33b to S$42b.
Because of the banks’ importance to investors, who inadvertently wind up with large chunks of the financial institutions even if they’re invested in a simple index tracker like the Nikko AM Singapore STI ETF (SGX: G3B) or SPDR Straits Times Index ETF (SGX: ES3), it might be worthwhile to take a closer look at them from an investor’s point of view.
there are certain key metrics that you can still focus on to gain a better investor’s perspective on banks.
Here are a couple:
1. Price to Tangible Book Value
My American colleague, Patrick Morris, calls tangible book value “the essential valuation metric for banks.” Just like the more ubiquitous Price to Earnings ratio, the higher the PTBV ratio is, the more expensive a bank is.
The book value of any company, including a bank, is calculated by subtracting all its liabilities from its assets. With a bank, we’ll like to go one step further and take away all the intangibles – assets that are not represented by real capital that accrue to common shareholders.
Mathematically, it’s represented as:
TBV = Total Equity – Minority Interests – Goodwill & Intangibles – Preferred Equity
2. Return on Asset
This metric measures how profitably a bank manages its assets. It ties in intimately to the PTBV ratio as the ROA of a bank gives us a gauge on how much premium the market would likely place upon a bank’s assets.
Here’s what American billionaire investor Warren Buffett – a keen investor in American banks – has to say on the topic:
“A bank that earns 1.3% or 1.4% on assets is going to end up selling above tangible book value. If it’s earning 0.6% or 0.5% on asset it’s not going to sell. Book value is not key to valuing banks. Earnings are key to valuing banks.”
Foolish Bottom Line
So there you go, two metrics that can provide you with a better perspective on banks from an investor’s point of view. Do note, however, that this is just the beginning. Any investment in a bank would likely require a much deeper dive.
And in any case, investing is More ART than science – there are NO Secret Formulas or Magic Numbers that can point to Instant success. There’s much more to do.
www.fool.sg/2013/12/05/two-key-numbers-to-understand-banks/