Economic performance of a Bank (National Australia Bank 2005)

Year 2005

Table 17: Gross value add in the community17
Year to 30 September 2005	$m
Net interest income	7,082
Fee income	4,157
Trading income	656
Net life insurance income	1,672
Other income	289
Net operating income	13,856
Significant revenue	2,493
Total net income	16,349
Other costs18	(3,811)
Movement in excess of net market value over net assets of life insurance controlled entities	335
Significant expense	(2,209)
Total	10,664
17 Gross value add in the community for the Group includes Australia, Europe, New Zealand, the United States and Asia. 18 Excludes salary-related costs, income tax relating to ordinary activities, payroll tax, fringe benefits tax, depreciation and goodwill and includes outside equity interests.

Table 18: 2005 distribution of community value
Distribution of community value	Australia $m	Europe $m	New Zealand $m
Shareholder19	2,125	1,525	424
Government20	1,665	251	131
Employees21	2,348	1,205	325
Depreciation & goodwill	268	175	73
19 Net profit attributable to ordinary shareholders. 20 Includes income tax relating to ordinary activities, payroll tax and fringe benefits tax. Excludes net GST and VAT payments. 21 Salary-related costs, excluding payroll tax and fringe benefits tax.

Interest expense
Year to 30 September 2005	$m
Deposits and other borrowings	10,401
Other financial institutions	1,780
Bonds, notes and subordinated debt	1,494
Other debt issues	115
Total interest expense	13,790

Full year dividend     166 cents

On 9 November 2005, a final dividend of 83 cents per full-paid ordinary share, 80% franked, was declared in respect of the year ended 30 September 2005. This brings the full year dividend to 166 cents (80% franked). Refer to Figure 22.

Diluted earnings per share     248 cents (after significant items)

Diluted earnings per share (after significant items) increased 26.5% from 196 cents to 248 cents. Refer to Figure 22.







http://www.nabgroup.com/0,,76586,00.html

Comparative analysis of Malaysian Banking Stocks (16.5.2010)

Comparative analysis of Malaysian Banking Stocks
A quick look at Malaysian Banking Stocks (16.5.2010)
http://spreadsheets.google.com/pub?key=t3v2VY0rD9DcGSjmVkAV-gQ&output=html

Investor's Checklist: Banks

1.  The business model of banks can be summed up as the management of three types of risk:  

• credit, 
• liquidity and 
• interest rate.

2.  Investors should focus on conservatively run institutions.  They should seek out firms that hold large equity bases relative to competitors and provision conservatively for future loan losses.

3.  Different components of banks' income statements can show volatile swings depending on a number of factors such as the interest rate and credit environment.  However, well-run banks should generally show steady net income growth through varying environments.  Investors are well served to seek out firms with a good track record.

4.  Well-run banks focus heavily on matching the duration of assets with the duration of liabilities.  For instance, banks should fund long-term loans with liabilities such as long-term debt or deposits, not short-term funding.  Avoid lenders that don't.

5.  Banks have numerous competitive advantages.  They can borrow money at rates lower than even the federal government.  There are large economies of scale in this business derived from having an established distribution network.  The capital-intensive nature of banking deters new competitors.  Customer-switching costs are high, and there are limited barriers to exit money-losing endeavors.

6.  Investors should seek out banks with 

• a strong equity base, 
• consistently solid ROEs and ROAs, and 
• an ability to grow revenues at a steady pace.

7.  Comparing similar banks on a price-to-book measure can be a good way to make sure you're not overpaying for a bank stock.


The Five Rules for Successful Stock Investing
by Pat Dorsey

Understanding Leverage

Leverage is easily expressed as a ratio:  assets/equity

Most banks equity:asset ratio is around 8% to 9%.  Thus, the average bank has a leverage ratio in the range of 12 to 1 or so, compared to 2 to 1 or 3 to 1 for the average company.

Given the size of the average bank's asset base relative to equity, it's not difficult to imagine a doomsday scenario.

• Earnings serve as the first layer of protection against credit losses.  
• If losses in a given period exceed earnings, a reserve account on the balance sheet serves as a second layer of protection.  Banks must have a pool of reserves to protect shareholders, who hold only a small stake in the company because of the leverage employed.
• If losses in a period exceed reserves, the difference comes directly from shareholders' equity.  When losses at a bank start destroying equity, turn out the lights.

Leverage isn't evil.  It can enhance returns, but there are inherent dangers.

For example, if you buy a $100,000 home with $8,000 down, your equity is 8%.  In other words, you're leveraged 12.5 to 1, which is pretty typical for a bank.  Now, if something atypical happens and the value of your home suddenly drops to $90,000 (just 10%), your equity is gone.  You still owe the lender $92,000 but the house isn't worth that much.  You could walk away from the house $8,000 poorer and still owe $2,000.  Highly leveraged businesses put themselves in a similar situation.

This doesn't mean all leverage is bad.  As a rule, the more liquid a company's balance sheet, the more the company can be leveraged because its assets can be quickly converted to cash at a fair price.

What should investors look for when investing in banks and other financiers?

What should investors look for when investing in banks and other financiers?

Because their entire business - their strengths and their opportunities - is built on risk, it's a good idea to focus on conservatively managed institutions that consistently deliver solid - but not knockout - profits.  Here's a list of some major metrics to consider.

Strong Capital Base

A strong capital base is the number one issue to consider before investing in a lender.  Investors can look at several metrics.

• The simplest is the equity to assets ratio; the higher, the better.  The level of capital should vary with each institution based on a number of factors including the riskiness of its loans.  Most of the bigger banks have capital ratios in the 8% to 9% range.  
• Also look for a high level of loan loss reserve relative to nonperforming assets.

These ratios vary depending on the type of lending an institution does, as well as the point of the business cycle in which they are taken.

Return on Equity and Return on Assets

These metrics are the de facto standards for gauging bank profitability.  

Investors should look for banks that can consistently generate mid- to high- teen returns on equity.  

Ironically, investors should be concerned if a bank earns a level not only too far below this industry benchmark, but also too far above it.  After all, many fast-growing lenders have thrown off 30% or more ROEs, just by provisioning too little for loan losses.  Remember, it can be very easy to boost bank's earnings in the short term by under-provisioning or leveraging up the balance sheet, but this can be unduly risky over the long term.  For this reason, it's good to see a high level of return on assets, as well.

For banks, a top ROA would be in the 1.2 % to 1.4% range.

Efficiency Ratios

The efficiency ratio measures non-interest expense, or operating costs, as a percentage of net revenues.  

Basically, it tells you how efficiently the bank is managed.  Many good banks have efficiency ratios under 55% (lower is better).

Look for banks with strong efficiency ratios as evidence that costs are being kept in check.

Net Interest Margins

Net interest margin looks at net interest income as a percentage of average earning assets.

Virtually all banks report net interest margins because it measures lending profitability.  

You'll see a wide variety of net interest margins depending on the type of lending a bank engages in, but most banks' margins fall into the 3% to 4% range.  

Track margins over time to get a feel for the trend - if margins are rising, check to see what's been happening with interest rates.  (Falling rates generally push up net interest margins.)

In addition, examine the bank's loan categories to see whether the bank has been moving into different lending areas. For example, credit card loans typically carry much higher interest rates than residential mortgages, but credit card lending is also riskier than lending money secured by a house.

Strong Revenues

Historically, many of the best-performing bank investments have been those that have proven capable of above-average revenue growth.  Wide margins have generally been elusive in a commodity industry that competes on service quality.  But, some of the most successful banks have been able to cross-sell new services, which adds to fee income, or pay a slightly lower rate on deposits and charge a slightly higher rate on loans.

Keep an eye on three major metrics:
(1) net interest margin,
(2) fee income as a percent of total revenues, and
(3) fee income growth.

The net interest margin can vary widely depending on economic factors, the interest rate environment, and the type of business the lender focuses on, so it's best to compare the bank you're interested in to other similar institutions.  Fee income made up 42% of bank industry revenue in 2001 and has grown at an 11.6% compound annual rate over the past two decades.  As always, examine the number over a  period of time to get a sense of the trend.

Price to Book 

Because banks' balance sheets consist mostly of financial assets with varying degrees of liquidity, book value is a good proxy for the value of a banking stock.

Typically, big banks have traded in the two or three times book range over the past decade; regionals have often traded for less than that.

A solid bank trading at less than two times book value is often worth a closer look.  Remember, there is almost always a reason the bank is selling at a discount, so be sure you understand the risks.  On the other hand, some banks are worth three times book value or more, but we would exercise caution before paying that much.


The Five Rules for Successful Stock Investing
by Pat Dorsey


Summary:

Equity to assets ratio (capital ratio):  8% to 9% or greater
Loan loss reserve:  High level of loan loss reserve relative to nonperforming assets.
ROE: mid- to high- teen ROE
ROA:  1.2% to 1.4% or higher
Efficiency ratios = (noninterest expense or operating costs)/(net revenues):  < 55% (lower is better)
Net Interest Margins = net interest income / average earning assets:  3% to 4% range
Strong above-average Revenue growth: Look at net interest margin + fee income as percentage of total revenue + fee income growth
Price-to-Book:   Big banks often trade at P/B 2 x  to 3 x range.

Book value is a good proxy for the value of a banking stock.

Because banks' balance sheets consist mostly of financial assets with varying degrees of liquidity, book value is a good proxy for the value of a banking stock.  Assuming the assets and liabilities closely approximate their reported value, the base value for a bank should be book value.  

• For any premium above the book value, investors are paying for future growth and excess earnings.  
• Seldom do banks trade for less than book, but if they do, the bank's assets could be distressed.  
• Typically, big banks have traded in the two or three times book range over the past decades; regionals have often traded for less than that.

A solid bank trading at less than two times book value is often worth a closer look.

• Remember, there is almost always a reason the bank is selling at a discount, so be sure you understand the risks.  
• On the other hand, some banks are worth three times book value or more, but we would exercise caution before paying that much.  

Bank stocks are volatile creatures, and you can find good values if you're patient - especially because even the best banks will generally be hit hard when any high-profile blowup occurs in the financial services sector.  Lining up several banks for a relative P/B valuation isn't as good as putting together a discounted cash flow model, but for this industry, it can be a reasonable approximation of the value of the business.

These metrics should serve as a starting point for seeking out quality bank stocks.  Overall, we think the best defense for investors who want to pick their own financial services stocks is

• patience and 
• a healthy sense of skepticism.  

Build a paper portfolio of core companies that look promising and learn the businesses over time.  Get a feel for

• the kind of lending they do, 
• the way that risk is managed, 
• the quality of management, and 
• the amount of equity capital the bank holds.  

When an opportunity presents itself - and one always does - you'll be in a much better position to act.

Inflation may check Singapore bank profits

Inflation may check Singapore bank profits
May 05, 2010


SINGAPORE, May 5 — Singapore banks are mostly set to post double-digit rises in quarterly earnings as loans grew and bad debts declined, but rising inflationary pressures are raising medium-term concerns that higher rates may squeeze margins.

The city-state’s banks are benefiting from a strong recovery in the domestic economy, which is projected to expand as much as 9 per cent this year, its best annual performance since 2004. Singapore’s economy shrank 2 per cent last year.

But inflation — which is expected to hit a two-year high in the fourth quarter — is also posing a risk to short-term interest rates, which hit rock bottom during the financial crisis as Asian economies battled the global financial crisis.

“The main risk is an interest rate risk — a sharp repricing of the short-end of the curve which would result in a narrowing of net interest margins,” said Peter Elston, a strategist at Aberdeen Asset Management Asia.

“That repricing of the short end would be the result of a sudden change in inflationary expectations,” said Elston. Aberdeen owns OCBC and UOB in Singapore and Public Bank in Malaysia.

Analysts are bullish about bank earnings as strong capital markets and higher trading in currencies and bonds have helped lift results at global banks that are recovering from the credit crisis.

“The market will be looking for evidence of revenue recovery and that the earnings uplift from lower loan impairments is now largely a foregone conclusion,” Natasha Midgley, an analyst at Standard Chartered, said in a note. “In light of recent newsflow, we see scope for revenue-driven earnings’ upgrades.”

NEW STRATEGY

Banks will also benefit from a strong recovery in investor demand for mutual funds and insurance products, boosting fee income.

Analysts are also looking for clues from DBS chief executive Piyush Gupta on the progress he has made in implementing his new strategy that aims to widen the Singapore bank’s reach in Asia.

JPMorgan’s Harsh Wardhan Modi said Gupta has made a promising start, but he would like to see more progress in improving DBS’s Hong Kong business and gaining bigger market share in the segment serving small-and-medium enterprises as Asian economies recover.

In Malaysia, where most analysts do not provide quarterly forecasts, Macquarie Research expects banks will report on average a 43 per cent growth in net profit for Jan-March from a year ago, amid lower bad-debt charges.

Maybank’s earnings are set to outperform this year after its last financial year was marred by big writeoffs linked to acquisitions in Indonesia and Pakistan. — Reuters

Method of fundamental analysis to find out cheap stock, particularly in banking sector.

FINDING OUT CHEAP STOCK

February 5th, 2010 | Author: admin

It is for those who like method of fundamental analysis to find out cheap stock, particularly in banking sector. There are 6 methods that can be used to, those are:

Price to Book Value (P/BV)

It is a method that has common tool used for evaluating bank stock, usually used to see the real value of a bank’s net asset. Investors usually have

• a will to buy stock at P/BV,  ROE 2 times when at least by 15% or
• a will to buy at P/BV, ROE 3 times if at least 20%.

Price to Earning Ratio (PER)

It is commonly understood as price of share compared with net income. This ratio is also often used as P/BV. But, the difference, it is usually used to compare PER of stock with

• PER of industry or
• PER of market.

The weakness of PER calculation is easy distortion by revenue that is unrelated to operation such as foreign exchange earning (or other) that could affect net income position outside the operational performance. PER of banking in 2010 reached 20 times, inline with PER of market in range of 12.5 times.

Price to Pre-Provision Profit (P/PPP)

Ratio of P/PPP is used to measure operational performance of company. Net income volatilities caused by imposition of provisional costs and tax costs can be avoided with this method which is only focus on company’s core business. Still there is criticism of this method, because cost of provision should also essential for the calculated to reflect bank’s management quality. Because of the lower-and-lower P/PPP value of bank’s stock, then it is said that bank’s stock price is considered cheap.

Market Cap to Deposit

This method is used to see how far a representation of bank’s potential growth prospect. The logic which is used in application of this ratio is representing fund that can be used by the bank to be channeled into productive asset, particularly loan channeled into high-impact result. Measurement of this ratio will only be valid if banking sector in good condition and not in financial crisis because of curtain reasons of bank.

Dividend Yield Compared with Risk Free Rate Return

It is valuation method used to accommodate those who argue that buying stock is only worth doing if offered dividend yield could be upper yield offered by risk free rate. The weakness of this method is not count possibility of price increase, especially for countries in category of emerging markets, which have capacity to provide high-enough investment return level from price appreciation only. Therefore, there are investors that more likely tend to get profit from higher price multiplication compared to dividend income.

ROE Compared With Cost of Equity

Rationality that is used in applying this ratio is when ROE of bank under its COE (number of return or minimum required return of investor to invest in a stock), then it is felt better to invest fund in other bank that give more profit. The weakness of this ratio is in risk premium or beta coefficient. Meanwhile, the weakness of ROE is difference of net income quality used to calculate ROE and capital optimizing (equity) owned by bank (whether too little or too much) that can affect the level of bank’s ROE.

(from: inter-sources)
http://techbostonworks.com/?p=407

Reforms, better earnings boost Malaysia finance stocks

Reforms, better earnings boost Malaysia finance stocks
Published: 2009/08/21

Bank stocks are still a 'buy' but investors have to be selective, says the chief investment officer at Kurnia Insurans

BETTER than expected earnings and the initiation of government-led reforms have given Malaysian bank stocks a big lift, helping the leading ones in the sector outperform the broader market.

Bumiputra-Commerce has risen 77 per cent so far this year, AMMB is up 65 per cent and Maybank has climbed 40 per cent. That compares with the main index's 33 per cent rise and Singapore-based DBS's 50 per cent and Oversea-Chinese Banking Corp's 57 per cent gains.

But recent economic indicators have been mixed. Central bank data show non-performing loans may have bottomed, staying at 2.2 per cent in June for the seventh month in a row, but loans growth has decelerated to 8.3 per cent year-on-year in June from 8.9 per cent in May.

"Bank stocks are still a "buy" but we have to be selective," says Pankaj Kumar, who manages about US$540 million (US$1 = RM3.53) of assets as chief investment officer at Kurnia Insurans Bhd, a local insurance company.

Kumar said he would buy shares of Bumiputra-Commerce, the holding company of Malaysia's No.2 lender and top deal maker CIMB, but avoid Maybank as the lender still faces headwinds from its acquisitions in Pakistan and Indonesia.

"We still see value in bank stocks as the (deal) pipeline continues to be big for fund-raising," said David Ng, who helps manage about US$1 billion of assets as chief investment officer at HwangDBS Investment Management.

Analysts said bank stocks have jumped as earnings expectations ratcheted up in tandem with the recovering capital markets, with most banks delivering April-June results that exceeded expectations due to healthy loan growth and a moderate bad-debts increase.

Bumiputra-Commerce posted a net profit of RM663 million for the second quarter, exceeding forecasts by 15.3 per cent, while AMMB's first-quarter net profit of RM258.2 million was 21.1 per cent above estimates.

BNP Paribas expects the Malaysian government to announce "more favourable policy initiatives" in the second half of 2009 and 2010, after foreign investors shunned the country, and in particular the banking sector.

The Malaysian government has lifted equity ownership restrictions in a bid to inject life into capital markets and draw in foreign investment as well as liberalised sections of the banking and fund management industry.

"As more regulatory impediments are removed, we expect more foreign direct investments," said BNP analyst Ng Wee Siang.

"(We are) still negative on Malaysian banks. The ongoing deceleration of loans growth reinforces our negative view on the sector," said Tan See Ping, analyst at Cazenove Asia.

Tan expects loan and fee income growth to slow sharply and provisions for bad debts to rise as the economy contracts in 2009.

Malaysia's government has forecast that the economy may shrink as much as 5 per cent in 2009. A Reuters poll of 11 economists in July forecast a contraction of 3.2 per cent.

"Our top sell is Public Bank. The current economic contraction and slowdown of loan growth looks particularly negative for (the bank)," said Tan. - Reuters

Comment:  What can one say.  Often the analysts' forecasts are just that.  No one can predict the future with certainty.

How Do Banks Make Profits?

How Do Banks Make Profits?
Traditional Centers of Bank Profits
© Carmelo Montalbano

Mar 27, 2009
Bank earnings are derived from four main operations: Loans and fees from lending operations, trading profits in bonds, trust department activities, investment banking.

.The basis for a bank's importance is its power to lend. The lending function matches institutions with excess liquidity with those in need of capital on a temporary, or intermediate term. The bank acts as the arbitrator of credit, understanding risk in order to lend, showing economic resilience in order to attract lenders.

Spread Lending Creates Opportunity
The basis for bank lending is their ability to collect deposits primarily through checking accounts, savings accounts, and certificates of deposit. In the last few years short term borrowing have been a major source of funding. This is possible in part because the yield curve is positively sloped giving banks a further advantage if they borrow short but extend their lending horizon. This deposit base is then lent out at a higher interest rate for loan origination and trading and portfolio operation. This lending arbitrage is called the 'spread.' The powerful ability to lend fuels the profitability of banking activities because banks can provide immediate loan resources for any banking deal they originate that requires such financing.

It is the spread that funds credit card lending, mortgage lending, corporate lending, lines of credit and foreign credit. It is from the arbitrage opportunity that reserves are taken for bad debt and 'impairments' or the temporary inability of a creditor to meet interest and principle payments.

Banking Fees and Investment Banking Activities
Advising banking clients and aiding them in financing their strategic plans is a natural result of the bank's lending activity. Investment banking includes the ability to earn fee income from municipalities, foreign governments, corporations, and international agencies. Advising clients is a natural opportunity for banks because as part of the lending function banks know the intimate details of a company's balance sheet and plans. Banks serve as consultants in mergers, acquisitions, public debt issuance and restructuring, real estate construction and financing, and leasing and corporate loan origination.

The Trust Function
Separate from other banking activities are trust activities. Trust is the wealth building and preservation business where, for a fee, banks advise high net worth individuals and companies on their retirement plans and savings. In addition to advisement banks may offer trust services where funds are invested by professional advisers into wealth building assets. This function resembles that of mutual funds but it is usually done on an individual, customized basis. Banks also provide custodial services whereby the bank acts as the intermediary between stockholder and bondholder providing payment services for interest, dividend and principal payments.



Read more: "How Do Banks Make Profits? Traditional Centers of Bank Profits" - http://investment-banking.suite101.com/article.cfm/how_do_banks_make_profits#ixzz0B6tEiiDC

How to analyze the market? Bank

Because the service that banks provide is so vital to long-term economic growth, the banking indutry is almost certain to grow in line with the world's total output, no matter which sector generates the greatest need for capital. Whether the demand for money comes from an industry such as technology or pharmaceuticals or consumers' incessant demand for housing, banks will benefit.

The banking business model is simple. Banks receive money from depositors and the capital markets and lend to borrowers,profiting from the difference, or spread. If a bank borrows money from a depositor at 4 percent and lends it out at 6 percent, the bank has earned a 2 percent spread, which is called net interest income. Most banks also make money from basic fees and other services, which is usually referred to as noninterest income. Combine net interest income and noninterest income to get net revenues, a view of the bank's top line. That's the banking model.

Interest income
- Interest expense
__________________
= Net interest income
- Provisions for loan losses
+ Noninterest income
__________________
= Net revenue


The low cost of borrowing - combined with the advantae banks have on the lending side - allows banks to earn attractive returns on their spread.

That said, because many banks enjoy these advantages, we think there are few that truly have wide economic moats. Money is a commodity, after all, and financial products are generic. So what makes one bank beter than another? Here are a few examples of wide-moat banks with different strategies:

• Citigroup uses its worldwide geographic reach and deep product bench to increase revenues and diversify its risk exposure, which allows it to perform well in even difficult environments.
• Wells Fargo is an expert at attracting deposits which area key source of lower cost funds, and it has a deeply ingrained sales culture that drives revenues.
• Fifth Third has an aggressive sales culture, a low-risk loan philosophy, and a sharp focus on costs.

It's all about Risk.

Whether a financial institution specializes in making commercial loans or consumer loans, the heart and soul of bnking is centered on one thing: risk management. Banks accept three types of risk:

1. credit,
2. liquidity, and
3. interest rate,

and they get paid to take on this risk. Borrowers and lenders pay banks through interest or fees bcause they are unwilling to manage the risk on ther own, or because banks can do it more cheaply.

But just as their advantage lies in mitigating others' risk, banks' greatest strength - the ability to earn a premium for managing credit and interest rate risk - can quickly become their greatest weakness if, for example, loan losses grow faster than expected.