Showing posts with label bank efficiency ratio. Show all posts
Showing posts with label bank efficiency ratio. Show all posts

Thursday 18 May 2023

Public Bank (RM 3.97 per share on 18/5/2023)

Income Statement
Public Bank Bhd
Dec 2022

 Interest Income 16.79 B
 Interest Expense 5.76 B
 Loan Loss Provision 365.56 M
 Non-Interest Income 3.33 B

Balance Sheet
Public Bank Bhd
Dec 2022

 Investments 81.84 B
 Net Loans 387.86 B
 Total Deposits 394.72 B
 Tier 1 Capital 46.78 B
 Book Value Per Share 2.59 

Comments:  
Net Loans:  Commercial & Industrial Loans 98.4B; Consumer & Installment Loans 258.1B; Broker & Financial Institution Loans 15.6B, and others.
Total Deposits:  Demand Deposits 68.7B; Savings/Time Deposits  326B.
Loans are well diversified to various borrowers.  The majority of deposits are in Saving/Time Deposits.


Cash Flow 
Public Bank Bhd
Dec 2022
 Net Financing Cash Flow +25.93 B
 Free Cash Flow +2.00 B
 Cash Flow Per Share +0.18  
 Free Cash Flow Per Share +0.14 
Free Cash Flow Yield 4.39%


Comments:  
Its net interest income = 10.66 B.  
Its non-interest income or fee income is about 31% of its net interest income.

It loans out 4.73x more than the amount it invested.
Its total deposits are more than its net loans.  
Given its Tier 1 Capital, it only has to borrow a small amount.



Earnings & Estimates 
Public Bank Bhd 
Qtr. EPS Est. +0.10  Q1 2023
Qtr. Year Ago +0.07 Q1 2022 
Ann. EPS Est. +0.35 FY 2023
Ann. Year Ago +0.32 FY 2022 


Comments:  
At RM 3.97 per share, it is trading at a future 2023 P/E of 11.3x.



Per Share Data 
Public Bank Bhd 
All values updated annually at fiscal year end 

Earnings Per Share +0.32
Sales 1.04 
Tangible Book Value 2.45
Operating Profit - 
Working Capital -8.45
Long Term Liabilities - 
Capital Expenditure 0.01
Capital Expenditure TTM 0.01 


Ratios & Margins 
Public Bank Bhd 
All values updated annually at fiscal year end 

Valuation 

P/E Ratio (TTM) 12.59 
P/E Ratio (including extraordinary items) 12.53 
Price to Sales Ratio 4.17 
Price to Book Ratio 1.67 
Price to Cash Flow Ratio 10.96 
Enterprise Value to EBITDA 11.08 
Enterprise Value to Sales 5.06 
Total Debt to Enterprise Value 0.41 
Total Debt to EBITDA - 
EPS (recurring) 0.32 
EPS (basic) 0.32 
EPS (diluted) 0.32 


Comments:  
At Price to Book Ratio of 1.67, and taking into consideration its efficiency, ROE and ROA, it is trading at a fair price.


Efficiency 

Revenue/Employee - 
Income Per Employee - 
Receivables Turnover - 
Total Asset Turnover 0.04 

Liquidity 

Current Ratio 0.14 
Quick Ratio - 
Cash Ratio - 

Profitability 

Gross Margin - 
Operating Margin +43.82 
Pretax Margin +43.88 
Net Margin +30.41 
Return on Assets 1.28 
Return on Equity 12.45 
Return on Total Capital 10.62 
Return on Invested Capital 8.88 


Comments:  
The high operating margin and the high pretax margin show that this bank is run efficiently.
The ROA and ROE are indicative of a well run and profitably run bank.


Capital Structure 

Total Debt to Total Equity 76.90 
Total Debt to Total Capital 43.47 
Total Debt to Total Assets 7.82 
Interest Coverage - 
Long-Term Debt to Equity 59.39 
Long-Term Debt to Total Capital 33.57 
Long-Term Debt to Assets 0.03

Comments:  
Its total asset/total equity is about 9.0 x.  It is not over-leveraged.  

Sunday 4 September 2016

How I Analyze a Bank Stock

How I Analyze a Bank Stock
A four-part framework to clarify banking.

Anand Chokkavelu (TMFBomb) Apr 29, 2014

Here's the beauty of the banking industry: Banks are similar enough that once you learn how to analyze one, you're pretty much set to analyze 500 of them.

That's about how many banks trade on major U.S. exchanges.

Now, the details get messy when you factor in complicated financial instruments, heavy regulations, byzantine operating structures, arcane accounting rules, the macro factors driving the local economies these banks operate in, and intentionally vague jargon.

But at their core, each bank borrows money at one interest rate and then lends it out at a higher interest rate, pocketing the spread between the two.

And as investors we can get far by focusing on four things:


  1. What the bank actually does
  2. Its price
  3. Its earnings power
  4. The amount of risk it's taking to achieve that earnings power


To give a concrete example, let's walk through one of the banks I've bought in the banking-centric real-money portfolio I manage for the Motley Fool: Fifth Third Bancorp (NASDAQ:FITB).

As quick background, Fifth Third is a regional bank based out of Cincinnati whose 1,300+ branches fan out across 12 states. It's large enough to be in the "too big to fail" group that gets stress tested by the Fed each year but still less than a tenth the size of a Bank of America or a Citigroup -- and much simpler.

Alright, let's start with...


1.  What the bank actually does

When you read through a bank's earnings releases, it's easy to get sidetracked by management's platitudes and high-minded promises -- guess what, EVERY bank says it's customer-focused and a conservative lender!

Words are nice, but in banking, you are your assets -- the loans you make, the securities you hold, etc. They're the things that will drive future profitability when they're chosen carefully, and they're the things that will force you to fail (or get bailed out) when you get in trouble.

Here's the asset portion of Fifth Third's balance sheet. Take a look, let your eyes glaze over, and then I'll let you know the numbers I focus on (until we get to the "Its price" section, I'm using the financials from Fifth Third's last 10-K because they're more detailed for illustrative purposes).
































Loans are the heart of a traditional bank.

In my mind, the greater a bank's loans as a percentage of assets, the closer it is to a prototypical bank.

In this case, two-thirds of Fifth Third's assets are loans (87,032/130,443). This number can range far and wide, but Fifth Third's ratio is pretty typical. For context, note that Fifth Third's loan percentage is double the much more complex balance sheet of JPMorgan Chase.

If a bank isn't holding loans, it's most likely holding securities. You'll notice Fifth Third's various buckets of securities in the balance sheet lines between its cash and its loans. There are many reasons a bank could hold a high percentage of securities.

  • For example, its business model may not be loan-driven
  • it may be losing loan business to other banks, or 
  • it may just be being conservative when it can't find favorable loan terms. 
In any case, looking at loans as a percentage of assets gives you questions to explore deeper.

The next step of digging into the loans is looking at what types of loans a bank makes. You can see in the balance sheet that Fifth Third neatly categorizes its $88.6 billion in loans. Clearly, Fifth Third is a business lender first and foremost: When you add up "Commercial and industrial loans," "Commercial mortgage loans," "Commercial construction loans," and "Commercial leases," almost 60% of Fifth Third's loans are business-related. Also, given the almost $40 billion in "Commercial and industrial loans" (as opposed to mortgage loans), a lot of Fifth Third's loans aren't backed up by real estate (though other forms of collateral may be in play).

For simplicity, I'll stop here. The one-line summary: On the assets side, look at the loans.

Let's move on to the rest of the balance sheet:
































Just as the loans tell the story on the assets side, the deposits tell the story on the liabilities side. The prototypical bank takes in deposits and makes loans, so two ratios help get a feel for how prototypical your bank is:

  • 1) Deposits/Liabilities 
  • 2) Loans/Deposits.


Deposits are great for banks for the same reason you complain about getting low interest rates on your checking and savings accounts. Via these deposit accounts, you're essentially lending the bank money cheaply. If a bank can't attract a lot of deposits, it has to take on debt (or issue stock on the equity side), which is generally much more expensive. That can lead to risky lending behavior -- i.e. chasing yields to justify the costs.

Fifth Third's deposit/liabilities ratio is 86%, which is quite reasonable and leads to an equally reasonable 89% loan/deposit ratio. All of this confirms what we suspected after looking at the loans on the asset side. Fifth Third is a bank that, at its core, takes in deposits and gives out loans with those deposits. If that wasn't the case, we'd want to get comfortable with exactly what it's doing instead.

We're now ready to take a quick peek at the income statement:



The big thing to focus on here is the two different types of bank income: 

  1. net interest income and 
  2. (you guessed it) noninterest income.


Still lost in that mess above? See the lines

  1. "Net Interest Income After Provision for Loan and Lease Losses" (3,332, or $3.332 billion) and 
  2. "Total noninterest income" (3,227, or $3.227 billion).


I told you earlier that at its core, a bank makes money by borrowing at one rate (via deposits and debt) and lending at another higher rate (via loans and securities). Well, net interest income measures that profit.

Meanwhile, noninterest income is the money the bank makes from everything else, such as

  • fees on mortgages, 
  • fees and penalties on credit cards, 
  • charges on checking and savings accounts, and 
  • fees on services like investment advice for individuals and corporate banking for businesses.


For Fifth Third, it gets almost as much income via noninterest means ($3.2 billion) as it does from interest ($3.3 billion).

Like most of what we've covered so far, that's not necessarily good or bad. It furthers our understanding of Fifth Third's business model. For instance, the noninterest income can smooth interest rate volatility but it can also be a risk if regulators change the rules (e.g. banks can no longer automatically opt you in to overdraft protection...meaning they get less of those annoying but lucrative overdraft fees).

There are many, many line items I'm glossing over on both the balance sheet and the income statement, but these are the main things I focus on when I'm looking over the financial statements. As you'll see, many of the things I've ignored are covered a bit by the ratios we'll look at in the other sections.

Next up is...



2.  Its price

The oversimplified saying in banking is "buy at half of book value, sell at two times book value."

Just as if I told you to "buy a stock if its P/E ratio is below 10, sell if it's over 25" there are many nuanced pitfalls here, but it at least points you in the right direction.

If you're unfamiliar with book value, it's just another way of saying equity. If a bank is selling at book value, that means you're buying it at a price equal to its equity (i.e. its assets minus its liabilities).

To get a little more conservative and advanced than price/book ratio, we can look at the price/tangible book ratio. As its name implies, this ratio goes a step further and strips out a bank's intangible assets, such as goodwill. Think about it. A bank that wildly overpays to buy another bank would add a bunch of goodwill to its assets -- and boost its equity. By refusing to give credit to that goodwill, we're being more conservative in what we consider a real asset (you can't sell goodwill in a fire sale). Hence, the price-to-tangible book value will always be at least as high as the price-to-book ratio.

In Fifth Third's case, it currently has a price-to-book value of 1.3 and a price-to-tangible book value of 1.5. In today's market that's a slight premium to the median bank.

Like any company, the reason you'd be willing to pay more for one bank than another is if you think its earning power is greater, more growth-y, and less risky.

Our first clue on Fifth Third's earnings power is also our last valuation metric: P/E ratio. Fifth Third's clocks in at just 10.7 times earnings. That's lower than its peers. In other words, although we're paying an above average amount for its book value, we're seeing that it's able to turn its equity into quite a bit of earnings.

Let's look further into that...


3.  Its earnings power

I talked a bit about how Fifth Third has a lower than average P/E ratio (high Earnings Yield) despite having a higher-than-average P/B ratio. The metric that bridges that gap is called return on equity (ROE). Put another way, return on equity shows you how well a bank turns its equity into earnings. Equity's ultimately not very useful if it can't be used to make earnings.

Over the long term, an ROE of 10% is solid. Currently, Fifth Third is at 12.3%, which is quite good on both a relative and absolute basis.

Breaking earnings power down further, you can look at

  1. net interest margin and 
  2. efficiency.


Net interest margin measures how profitably a bank is making investments. It takes the interest a bank makes on its loans and securities, subtracts out the interest it pays on deposits and debt, and divides it all over the value of those loans and securities. In general, it's notable if a bank's net interest margin is

  • below 3% (not good) or 
  • above 4% (quite good). 
Fifth Third is at 3.3%, which is currently higher than some good banks, lower than others.

While net interest margin gives you a feel for how well a bank is doing on the interest-generating side, a bank's efficiency ratio, as its name suggests, gives you a feel for how efficiently it's running its operations.

The efficiency ratio takes the non-interest expenses (salaries, building costs, technology, etc.) and divides them into revenue. So, the lower the better.

  • A reading below 50% is the gold standard. 
  • A reading above 70% could be cause for concern. 

Fifth Third is at a good 58%.

There are nuances in all this, of course. For instance, a bank may have an unfavorable efficiency ratio because it is investing to create a better customer service atmosphere as part of its strategy to boost revenues and expand net interest margins over the long term.

Meanwhile, ROE and net interest margins can be juiced by taking more risk.

So that brings us to...


4.  The amount of risk it's taking to achieve that earnings power

There are a lot (and I mean a LOT) of ratios that try to measure how risky a bank's balance sheet is. For example, when the Fed does its annual stress test of the largest banks, it looks at these five:


  1. Tier 1 common ratio
  2. Common equity tier 1 ratio
  3. Tier 1 risk-based capital ratio
  4. Total risk-based capital ratio
  5. Tier 1 leverage ratio.


If you think that's confusing, you should see their definitions -- they're chockfull of terms like "qualifying non-cumulative perpetual preferred stock instruments."

Personally, I rely on a much simpler ratio: assets/equity.

When you buy a house using a 20% down payment (that's your equity), your assets/equity ratio is at five (your house's value divided by your down payment).

For a bank, I get comfort from a ratio that's at 10 or lower. My worry increases the farther above 10 we go. Fifth Third's is at a reasonable 8.7 after its most recent quarter (8.9 if you're doing the math on the year-end balance sheet above).

We can get more complicated by using tangible equity, but this is a good basic leverage ratio to check out. If you're looking at a bigger bank like Fifth Third, it's also a good idea to check out the results of those Fed stress tests I talked about.

That leverage ratio gives us a good high-level footing. Getting deeper into assessing assets, we need to look at the strength of the loans. Let's focus on two metrics for this:


  1. Bad loan percentage (Non-performing Loans/Total Loans)
  2. Coverage of bad loans (Allowance for non-performing loans/Non-performing loans)


Non-performing loans are loans that are behind on payment for a certain period of time (90 days is usually the threshold). That's a bad thing for obvious reasons.

Like most of these metrics, it really depends on the economic environment for what a reasonable bad loan percentage is. 

  • During the housing crash, bad loan percentages above five percent weren't uncommon. 
  • In general, though, I take notice when a bank's bad loans exceed two percent of loans. 
  • I get excited when the bad loan percentage gets below one percent (so Fifth Third's 0.8% is looking good).


Banks know that not every loan will get paid back, so they take an earnings hit early and establish an allowance for bad loans. As you've probably guessed, banks can play a lot of games with this allowance.

  • Specifically, they can boost their current earnings by not provisioning enough for loans that will eventually default. 
  • That's why I like to see the coverage of bad loans to be at least 100%. Fifth Third's is at a conservative-looking 202%.


Finally, I use dividends as an additional comfort point. In an industry that has periods that incent loose lending, I like management consistently taking some capital out of its own hands. I like to see banks paying at least a two percent dividend. A bigger dividend isn't a foolproof way to gauge riskiness, but I get warm fuzzies from a bank that can commit to a decent-sized dividend. As for Fifth Third, it pays out about a quarter of its earnings for a dividend yield of 2.3%.


Putting it all together

I've tried to simplify analyzing a bank as much as I can. I've left out many metrics and concepts, but you've still been bombarded with a lot of potentially boring information.

What's important to remember is that a bank (through its management) is telling you a story about itself. It's our job to figure out whether we believe the tale enough to buy it at current prices.

Because most banks share similar business models, the numbers will go a long way to help you determine if those stories hold water.

If a bank says it's a conservative lender, but half of its loans are construction loans, it has a 10% bad debt ratio, and it's leveraged 20:1, I'm trusting the numbers not the words.

Look at the numbers over the last decade or two and you'll see many clues. When a bank has been able to deliver large returns across a few economic cycles while keeping the same general business model, that's a very good thing. Even better if the same management team has been there the whole time or if the bank clearly has a conservative culture in place that stays in place between management teams.

It's easy to get lost in the minutiae of analyzing a bank, but going in with a framework helps you keep your eyes on the big picture. What I've shared today are the four tenets of my basic framework...I hope it helps clarify yours.




Anand Chokkavelu, CFA owns shares of Bank of America, Citigroup, and Fifth Third Bancorp as well as warrants in Citigroup. He swears his other articles are more interesting. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America, Citigroup, and Fifth Third Bancorp. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

http://www.fool.com/investing/general/2014/04/29/how-i-analyze-a-bank-stock.aspx

Saturday 15 May 2010

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.

Friday 19 June 2009

Hallmarks of Success for Banks: Efficiency Ratios

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

Efficiency ratio
= non-interest expense / net revenues
= operating costs / net revenues

Basically, it tells how efficiently the bank is managed.

Many good banks have efficiency ratios under 55% (lower is better).


For comparison, the average efficiency ratio of all insured institutions in the fourth quarter of 2002 was 58.4%, according to the FDIC.

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


Related posts:
Hallmarks of Success for Banks
Hallmarks of Success for Banks: Strong Capital Base
Hallmarks of Success for Banks: ROE and ROA
Hallmarks of Success for Banks: Efficiency Ratios
Hallmarks of Success for Banks: Net Interest Margins
Hallmarks of Success for Banks: Strong Revenues
Hallmarks of Success for Banks: Price-to-Book