Financial Statistics
Nett Tangible Asset Backing Per Share (NTA/Share)
This is a more conservative measure than Nett Asset Backing Per Share (NAB/Shr). NTA/Shr is more conservative because the intangible assets (mainly goodwill) are deducted from the total value of the assets before dividing the amount by the number of share.
For most companies, the NTA and NAB are similar. NAB/Shr is supposed to show the actual nett amount of asset which is represented by each share of the company. This is an often quoted figure but its use is very limited. The reason being that the NAB/Shr is dependent on the total book value of the assets of company which in turn is dependent on the valuation method used to record the value of each piece of the assets fo the company. Some companies are very conservative and use the original purchase prices as the book values. Other companies use market values. Furthermore some of those companies which use market values may be over generous in their method of determining market values. Thus the true value of the assets of a company is very difficult to identify and can be very different from the book NAB of the company. We would advise the use of this piece of data with care. Additional research is needed before a firm judgement can be given.
The NTA/Shr can be used to compute the Price To Book Ratio by dividing the current price by this figure. This ratio shows how many times is the price higher than the NTA/Shr. Ceteris paribus the stock with the lowest Price To Book ratio for the same industry represents the best value. For example, a company selling at 70% of its NTA would seem like good value, as we can buy at well below the cost of its assets, unless it had originally bought its assets at well inflated prices.
Liquid Asset Per Share (Liq Assets/Share)
Liquid Asset is defined to include cash, bank balances and deposits. Generally a company which has a lot of liquid assets on hand is a financially strong one. A company which is financially weak is unlikely to have a lot of liquid assets on hand. However, some financially sound company do not have a lot of liquid assets as they may have other uses for their liquid assets. A very high ratio of liquid asset per share indicates high financial strength of a company.
Debt/Equity Ratio (D/E Ratio)
The D/E Ratio measure the ratio between the amount of Interest Bearing Debt a company has and the amount of Shareholders Equity. The amount of shareholders equity of a company is the same as its Nett Asset Backing. One must bear in mind what we have said about the lack of standardisation in measuring the value of the assets of a company.
D/E ratio is another crude measure of the financial strength of the company. The smaller is the debt relative to the equity, the stronger is a company. As a very rough guide, a D/E ratio of more than 0.5 is regarded as high and one of more than 1.0 is regarded as very high. A very low ratio supports the contention that a company is a financially strong one.
Altman's Z-Score
This is a popular "all in one" measure of the financial strength of a company. The higher the value of the Z-score, the stronger is the company financially. Simplistically, a Z-Score of below 2.00 indicated that the financial strength of a company is questionable and a score of above 2.00 is regarded as good.
It is to be noted that the computations of Z-score includes the price of the share and if the market price is very low, the Z-Score can be very low also. Further, it is to be noted that the Z-score computed for a particular financial year for the situation as at the end of the financial year. The current situation may be very different from that at the year end.
Asset Turnover
This ratio indicates the efficiency with which the company is able to use all its assets to generate sales. Generally, the higher a company's total asset turnover, the more efficiently its assets have been used. Please note that different industries tend to have different asset turnover ratio. This ratio should only be used for comparing firms in the same industry. (Asset Turnover = Total Sales/ Total Assets)
Gross Margin
Gross Margin equals Gross Profit/Sales. Gross Profit is defined as Sales Revenue - Cost of Goods Sold. Gross margin measures (roughly) the percentage value added by a firm on its raw material before selling it. For the same industry, the higher is the gross margin of a firm, the higher is the potential for obtaining profit and the better is the management quality.
Free Cashflow to Capital
FCF is the amount of nett cashflow left after paying for re-investment in fixed and current assets. FCF measures the ability of a firm to pay out dividend. FCF/Capital compares the FCF of a firm with the total capital employed (defined as total shareholders equity & debt). The higher the ratio, the more efficiently is the firm using its capital.
Return on Equity (ROE)
In the West this is considered to be a most important ratio for it is an indication of how well the management is making use of the assets of the company in generating return for its shareholders. Generally, it should not be less than 10% averaged over time. However, owing to the fact that a great number of local Malaysian companies have vastly overvalued their assets, their ROE is very low. We consider low ROE to be a red flag. It shows either the company is poor in managing its assets or high in revaluing its assets or both. Either of these is not a good sign.
Ref:
How to use the Stock Performance Guide (SPG)
Stock Performance Guide by Dynaquest Sdn. Bhd.
Wednesday, 5 August 2009
Some GEMS from SPG
Some GEMS from SPG:
Corporate Information
1. Market Capitalisation:
This gives an indication of the worth of the company placed by the market. On occasions, the worth maybe too high. Certain small companies may have market capitalisation of many billions. At times like this, the market capitalisation gives a sense of reality. During period of extreme bullishness, all Bursa Malaysia companies have a minimum value (about RM200 m). If the market capitalisation is below this value, the company maybe under-valued during this type of market.
2. Segment Information:
Most companies operate in more than one sector of the economy and different sectors of the economy perform differently. A better understanding of the company can be obtained if the sales and profit before tax of each segment is separately provided.
Market & Financial Statistics
3. 3-Year Price Chart:
The weekly price chart of the stock for last three years give a visual indication of the current valuation relative to historical valuation. A stock whose price is very high or very low relative to its historical level is probably worth investigating further.
The Critical Stockmarket Information
The Annual Information
4. Adjusted Price Range
The adjusted price range over the past decade would give a good idea of the range and trend of price movements of a particular stock. The most important use of the price range is to consider the trend of the price over the years and compare it with the growth of earnings and dividend as well as consider it in relationship to common sense.
Generally, beware of sudden price movements upward from a low previous level because such upward movements usually cannot be sustained. Similarly if the price has been in a sharp fall inspite of reasonable DY and PER, it usually will recover in due course.
The second most important use of this information is to consider the size of the price range in the past. The greater the range of movement, the more volatile is the share's price and the riskier it is as an investment. An investor has to be particularly careful if he is considering buying a highly volatile share which is not backed by good dividend or earnings. Even worse is the situation in which the volatile shares is selling at a high price.
5. Adjusted Dividend per Share (DPS)
This is the most important column to look at when evaluating the worth of a share. The ideal situation is for the DPS of a company to grow smoothly and rapidly over the years. There is one important caveat in the use of this information; the amount of dividend paid out must be compared with the amount of earnings per share (EPS). The growth of DPS must be proportionate to the growth of EPS. A company cannot sustain year after year of higher DPS than EPS. On the other hand, the DPS should not be too small compared with the EPS unless the EPS is growing rapidly. Under normal circumstances, the DPS should be between 30-70% of the EPS.
6. Adjusted Earnings per Share (EPS)
This column shows the progress made by the company in terms of its earnings per shares. As with DPS, the ideal situation is one in which the EPS grows smoothly and rapidly. Failing that a company ought to have either a stable or growing EPS. The worst would be for a company which has highly variable AND declining EPS. This is the second most important information to look at when one is trying to evaluate the worth of a share.
Starting from FY97, extraordinary gain/loss is excluded from the computation of bottomline earnings while "exception" gain/loss is not. To prevent violent fluctuations in EPS, SPG continues to exclude these from the computation of bottomline earnings, except in cases where such gains/loss may be regarded as part of the ordinary business of the firms.
7. Adjusted DY Range
This information is only truly useful if the shares are investment grade shares. By this we mean shares which are not speculative and whose prices bear reasonably stable relationship with its DPS and EPS. Regretably, in the Bursa Malaysia a large number of shares fall into the speculative category.
It is very important to know the DY of a share because this figure provides us with a direct comparison against the return we can get from fixed deposit. The return we can expect from a share should bear some relationship to the average return on fixed deposit.
Very generally speaking, the DY of share we want to invest in ought to fall roughly within the range of 2-6%. Investors are willing to accept lower DY for shares with faster growing DPS/EPS and vice versa. We ought to buy share with DY of less than 1.5% only in exceptional circumstances.
The DY range is the minimum and maximum DY for a given year calculated using the highest and lowest prices for a given year. This information allows investors to relate the current DY to the range of DY experienced by the share in the past. Ideally, the DY at the price which one is considering buying the share should be at worst be in the middle of its past range. Thus, we always ought to check the historical range of DY before the purchase of a share. If the DY is too low, we ought to be very careful.
8. Adjusted PER Range
Ref:
How to use the Stock Performance Guide (SPG)
Stock Performance Guide by Dynaquest Sdn. Bhd.
Corporate Information
1. Market Capitalisation:
This gives an indication of the worth of the company placed by the market. On occasions, the worth maybe too high. Certain small companies may have market capitalisation of many billions. At times like this, the market capitalisation gives a sense of reality. During period of extreme bullishness, all Bursa Malaysia companies have a minimum value (about RM200 m). If the market capitalisation is below this value, the company maybe under-valued during this type of market.
2. Segment Information:
Most companies operate in more than one sector of the economy and different sectors of the economy perform differently. A better understanding of the company can be obtained if the sales and profit before tax of each segment is separately provided.
Market & Financial Statistics
3. 3-Year Price Chart:
The weekly price chart of the stock for last three years give a visual indication of the current valuation relative to historical valuation. A stock whose price is very high or very low relative to its historical level is probably worth investigating further.
The Critical Stockmarket Information
The Annual Information
4. Adjusted Price Range
The adjusted price range over the past decade would give a good idea of the range and trend of price movements of a particular stock. The most important use of the price range is to consider the trend of the price over the years and compare it with the growth of earnings and dividend as well as consider it in relationship to common sense.
Generally, beware of sudden price movements upward from a low previous level because such upward movements usually cannot be sustained. Similarly if the price has been in a sharp fall inspite of reasonable DY and PER, it usually will recover in due course.
The second most important use of this information is to consider the size of the price range in the past. The greater the range of movement, the more volatile is the share's price and the riskier it is as an investment. An investor has to be particularly careful if he is considering buying a highly volatile share which is not backed by good dividend or earnings. Even worse is the situation in which the volatile shares is selling at a high price.
5. Adjusted Dividend per Share (DPS)
This is the most important column to look at when evaluating the worth of a share. The ideal situation is for the DPS of a company to grow smoothly and rapidly over the years. There is one important caveat in the use of this information; the amount of dividend paid out must be compared with the amount of earnings per share (EPS). The growth of DPS must be proportionate to the growth of EPS. A company cannot sustain year after year of higher DPS than EPS. On the other hand, the DPS should not be too small compared with the EPS unless the EPS is growing rapidly. Under normal circumstances, the DPS should be between 30-70% of the EPS.
6. Adjusted Earnings per Share (EPS)
This column shows the progress made by the company in terms of its earnings per shares. As with DPS, the ideal situation is one in which the EPS grows smoothly and rapidly. Failing that a company ought to have either a stable or growing EPS. The worst would be for a company which has highly variable AND declining EPS. This is the second most important information to look at when one is trying to evaluate the worth of a share.
Starting from FY97, extraordinary gain/loss is excluded from the computation of bottomline earnings while "exception" gain/loss is not. To prevent violent fluctuations in EPS, SPG continues to exclude these from the computation of bottomline earnings, except in cases where such gains/loss may be regarded as part of the ordinary business of the firms.
7. Adjusted DY Range
This information is only truly useful if the shares are investment grade shares. By this we mean shares which are not speculative and whose prices bear reasonably stable relationship with its DPS and EPS. Regretably, in the Bursa Malaysia a large number of shares fall into the speculative category.
It is very important to know the DY of a share because this figure provides us with a direct comparison against the return we can get from fixed deposit. The return we can expect from a share should bear some relationship to the average return on fixed deposit.
Very generally speaking, the DY of share we want to invest in ought to fall roughly within the range of 2-6%. Investors are willing to accept lower DY for shares with faster growing DPS/EPS and vice versa. We ought to buy share with DY of less than 1.5% only in exceptional circumstances.
The DY range is the minimum and maximum DY for a given year calculated using the highest and lowest prices for a given year. This information allows investors to relate the current DY to the range of DY experienced by the share in the past. Ideally, the DY at the price which one is considering buying the share should be at worst be in the middle of its past range. Thus, we always ought to check the historical range of DY before the purchase of a share. If the DY is too low, we ought to be very careful.
8. Adjusted PER Range
PER is probably the most commonly used ratio for evaluating the worth of a share. SPG does not recommend its use by laymen as strongly as DY because in Malaysia, EPS tend to fluctuate a great deal and as a result this makes the resultant PER less stable and difficult to use.
PER is an important ratio because it gives us a quick idea of, in a sense, how quickly an investor can get back his money in the form of earnings after buying the shares. A share purchased at a PER of 33 would mean that the purchase price is 33 times larger than the current earnings capacity of the share one is buying. That is, if the EPS stays unchanged, it would take 33 years for the earnings to equate to the buying price. For this reason, SPG does not recommend the purchase of a share at PER of much greater than 20 in normal circumstances.
Although the use of PER seems simple, there are several problems in the use of PER which render it not very usable by laymen at times. The first problem is that owing to the lack of stability of EPS for many Malaysian shares, there are years when the EPS is very low. When that happens, the computed PER is very high. This would make the share seem very expensive for that particular year. However, the high PER is only due to the abnormally low EPS for a single year and cannot be taken as representative of the average situation. The same problem in reverse occurs if the EPS is exceptionally high. Ideally, the concept of PER is only applicable if the share has very stable EPS or if the PER is computed using some sort of average or normalised EPS. The second problem, is that, whenever the EPS of a share is negative, it is not possible to calculate a meaningful PER figure.
As with the DY range, the PER range is the range of PER for a given year calculated using the highest and lowest prices for a given year. The reason for providing this information is that investors can relate the current PER to the range of PER experienced by the share in the past. Ideally, the PER at the price which one is considering buying the share should be at worst in the middle of their past ranges. Thus we ought to check the historical range of PER before the purchase of a share. If the PER is high by historical standard we ought to be doubly careful. In a company where its EPS had been volatile, PER range is not as useful as in the case of a company with stable EPS. A PER ratio towards the low end of its historical PER range would seem to suggest that its valuation is low at this price level
Non-Annual Critical Market Information
9. 5 and 10-year Growth Rates for Price, DPS and EPS
Serious investors pay a lot of attention to the growth rates of price, EPS and DPS. Growth rates over a long period (5 and 10 years)overcome the problem of cyclical fluctuations in earnings, dividend and price.
These growth rates provide three useful types of information. First, a comparison of the growth rate of price against those of earnings and dividends gives the investors a clue to the sustainability and valuations level of the current price. Second, a comparison of the growth rate of dividend against earnings give a clue of the sustainability of the current dividend. Averaging the growth rates of the high and low prices give some idea of the growth rate of the mid-range price. Once you have the growth rate of the mid-range price, you can then compare it with the growth rates of the EPS and DPS. If its price has been growing at a very much faster rate than earnings and dividend, it probably cannot be sustained. Similar comment would apply to a comparison of the dividend and earnings growth rate.
Third, the growth rates of the EPS and DPS provides us with a useful measure of the management quality of the company. If we compare its growth rates with those of other companies in similar line of business, a better than average growth rate would signify above average management quality.
When using these figures, investors are cautioned to be aware of the fact that things in recent years may be very different from those of earlier years. Although a company's ten year EPS or DPS growth rate may be good, its actual performance over the last five years could have been lacklustre due to the Asian Crisis. It would be risky to evaluate it on its average five or ten years' growth rate alone. (Therefore, need to study the individual years data too).
10. Average Values of 5-Year & 10-Year DY Range and PER Range
The reason for providing this type of information is to aid the users in determining whether the current price of a stocks is reasonable compared with the historical records. Ideally, the DY and PER ranges provide guidelines as to the expected ranges of a stock's future DY and PER. One should not purchase a stock if its DY is far below or the PER far above the historical range. The previous statement however must be applied with care if the current DPS/EPS is not normal. In an abnormal year, excessively low DPS or EPS can give rise to false readings in terms of the DY/PER. One should always refer to the 5- and 10-year growth rates for DPS/EPS to see whether the current level of DPS/EPS is in line with previous years figures. Otherwise, one should use the average DPS and EPS for the computation of the DY or PER.
Ref:
How to use the Stock Performance Guide (SPG)
Stock Performance Guide by Dynaquest Sdn. Bhd.
When to buy a stock?
In trying to decide when to buy a stock, an investor has to take into consideration several factors:-
- How does the present price compare with the historical prices?
- How does the price trend compare with its earnings and dividend trends?
- Is the current EPS and/or DPS unusually high or low?
- At the current price, how do the PER and DY compare with the historical PER and DY ranges?
- Does the present price look reasonable compared with the historical price or does it look too high or too low?
Ref:
How to use the Stock Performance Guide (SPG)
Stock Performance Guide by Dynaquest Sdn. Bhd.
Which stock to buy?
In trying to decide which stock to buy, an investor has to take into consideration the following factors:-
- What are the trends of the earnings and dividend of the stock?
- How well does the price trend correclate with the earnings and dividend trend?
- Is there a divergence between earnings and dividend?
- How volatile has the share price been in the past?
- How do the present PER and DY of the stock compared with the PER and DY of other stocks in the same sector?
- What are the prospects of the stock?
Ref:
How to use the Stock Performance Guide (SPG)
Stock Performance Guide by Dynaquest Sdn. Bhd.
What stock am I buying?
In trying to answer the above question, the investor has to find out certain important things about the stock, principally:-
- Who are the principal shareholders and officers of the company? Are they well known? Well connected?
- Do they have long experience and good reputation? Are other companies in the group good performers?
- What activity/ies is the company involved in?
- How good is the management of the company?
- How well is each segment of the company doing?
- What is the capital of the company?
- What is the financial strength and liquidity of the company?
Ref:
How to use the Stock Performance Guide (SPG)
Stock Performance Guide by Dynaquest Sdn. Bhd.
Buffett's Rules for Success
- Ascertain the true quality of a company and its top managers.
- Stockholders are not managers. They should leave the running of a firm to competent managers with integrity.
- Don't invest in businesses you don't understand.
- Give help and advice if they want it, but let the managers make their own decisions.
- Never, ever break the law.
- Owners are owners and managers are managers - but they should work as partners.
- Keep your distance from the market. You'll understand the business better!
Warren Buffett has turned value investing into an art form, piling up the world's second largest individual fortune and persuading millions to mimic the low-tech, buy-and-hold style of stock picking he practices at Berkshire Hathaway.
Emulate Warren Buffett - be an ace stockpicker and an empire-builder too. :-)
Tuesday, 4 August 2009
An occasional rumination
For those who remained invested during the bear market, the recent up-trend in the market has been very rewarding. Those in this envious position are sitting on a profit buffer.
The severe bear market has resulted in a large amount of cash pulled out of stocks. The recent few months saw investors moving these cash into stocks. The pace was slow initially, but the prices have risen fast. However, it is my guess that a lot of money is still waiting to jump into stock. Some may be waiting for a correction. Perhaps, others maybe impatient seeing the prices going up almost daily.
History has shown that more people lost money in a bull market than in a bear market.
The severe bear market has resulted in a large amount of cash pulled out of stocks. The recent few months saw investors moving these cash into stocks. The pace was slow initially, but the prices have risen fast. However, it is my guess that a lot of money is still waiting to jump into stock. Some may be waiting for a correction. Perhaps, others maybe impatient seeing the prices going up almost daily.
History has shown that more people lost money in a bull market than in a bear market.
GE Life agents to return commissions
GE Life agents to return commissions
SINGAPORE, Aug 4 — About 1,000 Great Eastern Life agents have been asked to return up to S$12.6 million (RM30.1 million) in commissions received from policies they sold up to four years ago.
The GreatLink Choice (GLC) policies are investments the insurer decided last Friday to buy back at full cost.
About 18,000 policyholders invested a total of S$594 million in the policies, buying from the insurer’s network of agents.
Agents earned a 2.12 per cent commission on sales. On average, they earned about S$12,600 each, though some earned close to S$100,000. Now, they will have to give back the money.
This is believed to be the first time that sellers of financial products are being asked to return commissions on products they sold years ago, without admitting to any wrongdoing.
So far, insurers have clawed back commissions only from agents found to have improperly sold policies to customers.
Consumer advocates welcomed Great Eastern’s move, saying it could prove pivotal for the industry.
“In broader terms, this could be a turning point to tie commission payment to performance of the investment that agents introduced to investors,” said Consumers Association of Singapore (Case) executive director Seah Seng Choon.
If this became a trend, he added, it would augur well for the industry as agents would have a stake in ensuring that investors get prudent advice.
On Friday, Great Eastern announced that it would return the premiums in full to all GLC customers, minus the annual payouts they had already received.
Like Lehman Minibonds, GLC was an insurance policy linked to a class of complex financial instruments called collateralised debt obligations (CDOs).
The value of CDOs has been badly hit by diving financial markets, and the value of various GLC plans have plummeted between 40 per cent and 80 per cent. So Great Eastern decided to make a full refund, calling it a gesture of goodwill.
Great Eastern said GLC products were sold by fewer than half of its agency force of 2,500, and went out in five tranches between 2005 and 2007.
Affected customers have up to Aug 28 to opt to get their money back.
Explaining its decision to recover all commissions, Great Eastern said it is offering to treat the GLC policies as if they had been cancelled from inception.
“It is therefore necessary to recover all the costs relating to these policies, including commissions paid to the life planners,” said its managing director (Singapore), Tan Hak Leh.
With the average agent needing to fork out more than S$10,000 in returned commissions, Great Eastern is putting in place an instalment plan to help agents with cashflow problems.
‘We will ensure that none of our life planners will face any financial difficulties,’ Tan said.
Despite having to stump up cash at short notice, Great Eastern agents The Straits Times spoke to were choosing to look at the issue long-term.
Said an agency director who may have to return about S$85,000 in commissions: “In a situation like this, every stakeholder stands to lose something. I can’t expect to win and still pocket my commissions.
“Besides, I depend on repeat customers and their referrals, so confidence and trust are important.”
Agents also noted that policyholders who redeem their GLC policies may re-invest in new products, so there was some potential to recoup the lost commissions.
Case’s Seah said that Great Eastern’s action will help to salvage the confidence of investors not only in the company, but also in its agents in the long run.
He hoped this would set a new precedent for other distributors of financial products. — The Straits Times
SINGAPORE, Aug 4 — About 1,000 Great Eastern Life agents have been asked to return up to S$12.6 million (RM30.1 million) in commissions received from policies they sold up to four years ago.
The GreatLink Choice (GLC) policies are investments the insurer decided last Friday to buy back at full cost.
About 18,000 policyholders invested a total of S$594 million in the policies, buying from the insurer’s network of agents.
Agents earned a 2.12 per cent commission on sales. On average, they earned about S$12,600 each, though some earned close to S$100,000. Now, they will have to give back the money.
This is believed to be the first time that sellers of financial products are being asked to return commissions on products they sold years ago, without admitting to any wrongdoing.
So far, insurers have clawed back commissions only from agents found to have improperly sold policies to customers.
Consumer advocates welcomed Great Eastern’s move, saying it could prove pivotal for the industry.
“In broader terms, this could be a turning point to tie commission payment to performance of the investment that agents introduced to investors,” said Consumers Association of Singapore (Case) executive director Seah Seng Choon.
If this became a trend, he added, it would augur well for the industry as agents would have a stake in ensuring that investors get prudent advice.
On Friday, Great Eastern announced that it would return the premiums in full to all GLC customers, minus the annual payouts they had already received.
Like Lehman Minibonds, GLC was an insurance policy linked to a class of complex financial instruments called collateralised debt obligations (CDOs).
The value of CDOs has been badly hit by diving financial markets, and the value of various GLC plans have plummeted between 40 per cent and 80 per cent. So Great Eastern decided to make a full refund, calling it a gesture of goodwill.
Great Eastern said GLC products were sold by fewer than half of its agency force of 2,500, and went out in five tranches between 2005 and 2007.
Affected customers have up to Aug 28 to opt to get their money back.
Explaining its decision to recover all commissions, Great Eastern said it is offering to treat the GLC policies as if they had been cancelled from inception.
“It is therefore necessary to recover all the costs relating to these policies, including commissions paid to the life planners,” said its managing director (Singapore), Tan Hak Leh.
With the average agent needing to fork out more than S$10,000 in returned commissions, Great Eastern is putting in place an instalment plan to help agents with cashflow problems.
‘We will ensure that none of our life planners will face any financial difficulties,’ Tan said.
Despite having to stump up cash at short notice, Great Eastern agents The Straits Times spoke to were choosing to look at the issue long-term.
Said an agency director who may have to return about S$85,000 in commissions: “In a situation like this, every stakeholder stands to lose something. I can’t expect to win and still pocket my commissions.
“Besides, I depend on repeat customers and their referrals, so confidence and trust are important.”
Agents also noted that policyholders who redeem their GLC policies may re-invest in new products, so there was some potential to recoup the lost commissions.
Case’s Seah said that Great Eastern’s action will help to salvage the confidence of investors not only in the company, but also in its agents in the long run.
He hoped this would set a new precedent for other distributors of financial products. — The Straits Times
Sector Snapshots: A graphical presentation
An interesting graphical way to look at stocks of various sectors.
http://www.nytimes.com/packages/khtml/2006/04/02/business/20060402_SECTOR_GRAPHIC.html?ref=business
http://www.nytimes.com/packages/khtml/2006/04/02/business/20060402_SECTOR_GRAPHIC.html?ref=business
Investment Banking Buoys HSBC and Barclays
Investment Banking Buoys HSBC and Barclays
By JULIA WERDIGIER
Published: August 3, 2009
LONDON — HSBC Holdings and Barclays reported robust first-half profits Monday based largely on the performance of their investment-banking businesses, along with their Wall Street peers. Yet the banks also set aside a combined $22 billion to cover potentially bad debts as recession and high unemployment lead to more retail loans going sour.
The two banks, among the largest in Britain, were the first of a group of European banks, including UBS and Royal Bank of Scotland, to report earnings this week. Some analysts predict that the industry will continue to struggle because fewer clients can repay their debts as the global downturn continues.
HSBC’s profit fell 57 percent from a year ago after the bank set aside $13.9 billion in credit risk provisions and said the timing and scale of a “recovery in the wider economy remains highly uncertain.” Profit at Barclays increased 10 percent after earnings at its investment banking unit almost doubled but reserves against anticipated loan losses, also called impairment charges, reached £4.6 billion, or $7.7 billion.
“The underlying trend is rising bad debts and there are still at least one or two more quarters to come,” said Julian Chillingworth, chief investment officer at Rathbone in London.
HSBC and Barclays joined banks like Credit Suisse and JPMorgan Chase in benefiting from a strong performance of their investment-banking units even as loan loss provisions climbed. Demand for investment banking services rose because more companies are seeking to sell shares and bonds to raise capital.
As it has among Wall Street banks, a rift is emerging in Europe between those banks that remained relatively unscathed during the financial crisis and can now grow and benefit from their investment banking services and those that accepted government funds and needed to scale back riskier operations.
HSBC and Barclays could expand their investment banking operations while rivals like Royal Bank of Scotland and Lloyds, which accepted government funds, are struggling to cut costs and recover from huge losses. Rather than accept government assistance, HSBC conducted a rights offer and Barclays tapped foreign investors to raise capital.
Shares in HSBC gained about 5 percent in London on Monday and shares in Barclays jumped 7 percent. The share price of Barclays has more than doubled since the beginning of this year, while HSBC stock is down about 5 percent amid concern about rising loan-loss provisions and its struggling mortgage lending business in the United States.
Rising loan losses among European banks continue to spook investors. Deutsche Bank’s loan provisions of 1 billion euros, or $1.4 billion, for the second quarter sent the company’s shares lower even though the bank’s net income rose and revenue from sales and trading at its investment bank unit more than doubled.
Barclays said profit rose to £1.89 billion in the first half of this year from £1.72 billion. Impairment charges increased 86 percent to £4.6 billion and pretax profit at its British retail business dropped 61 percent. At Barclays Capital, its investment-banking unit, earnings rose to £1.05 billion from £524 million.
Barclays is benefiting from an expansion into investment banking services; it bought Lehman Brothers’ American businesses and has been hiring senior bankers in Europe and Asia this year.
Robert E. Diamond Jr., president of Barclays, said Barclays Capital’s expansion is about two-thirds done “but more is to do in Asia.” He expects income from the cash-equities and advisory business to continue to grow and said the pipeline for financing, fixed-income and risk management services is “very big.”
Barclays, which said it planned to resume paying dividends before the end of this year, struck a note of caution Monday, predicting that loan losses will continue to go hand-in-hand with unemployment rates. “We expect the remainder of 2009 to be challenging,” John Varley, the bank’s chief executive, said in a statement. “We expect credit-market losses to be lower than in the first half but impairment trends to be consistent with those experienced over the first half.”
Stephen Green, HSBC’s chairman, was more optimistic when he said that “it may be that we have passed, or are about to pass, the bottom of the cycle in the financial markets.”
http://www.nytimes.com/2009/08/04/business/global/04banks.html?ref=business
By JULIA WERDIGIER
Published: August 3, 2009
LONDON — HSBC Holdings and Barclays reported robust first-half profits Monday based largely on the performance of their investment-banking businesses, along with their Wall Street peers. Yet the banks also set aside a combined $22 billion to cover potentially bad debts as recession and high unemployment lead to more retail loans going sour.
The two banks, among the largest in Britain, were the first of a group of European banks, including UBS and Royal Bank of Scotland, to report earnings this week. Some analysts predict that the industry will continue to struggle because fewer clients can repay their debts as the global downturn continues.
HSBC’s profit fell 57 percent from a year ago after the bank set aside $13.9 billion in credit risk provisions and said the timing and scale of a “recovery in the wider economy remains highly uncertain.” Profit at Barclays increased 10 percent after earnings at its investment banking unit almost doubled but reserves against anticipated loan losses, also called impairment charges, reached £4.6 billion, or $7.7 billion.
“The underlying trend is rising bad debts and there are still at least one or two more quarters to come,” said Julian Chillingworth, chief investment officer at Rathbone in London.
HSBC and Barclays joined banks like Credit Suisse and JPMorgan Chase in benefiting from a strong performance of their investment-banking units even as loan loss provisions climbed. Demand for investment banking services rose because more companies are seeking to sell shares and bonds to raise capital.
As it has among Wall Street banks, a rift is emerging in Europe between those banks that remained relatively unscathed during the financial crisis and can now grow and benefit from their investment banking services and those that accepted government funds and needed to scale back riskier operations.
HSBC and Barclays could expand their investment banking operations while rivals like Royal Bank of Scotland and Lloyds, which accepted government funds, are struggling to cut costs and recover from huge losses. Rather than accept government assistance, HSBC conducted a rights offer and Barclays tapped foreign investors to raise capital.
Shares in HSBC gained about 5 percent in London on Monday and shares in Barclays jumped 7 percent. The share price of Barclays has more than doubled since the beginning of this year, while HSBC stock is down about 5 percent amid concern about rising loan-loss provisions and its struggling mortgage lending business in the United States.
Rising loan losses among European banks continue to spook investors. Deutsche Bank’s loan provisions of 1 billion euros, or $1.4 billion, for the second quarter sent the company’s shares lower even though the bank’s net income rose and revenue from sales and trading at its investment bank unit more than doubled.
Barclays said profit rose to £1.89 billion in the first half of this year from £1.72 billion. Impairment charges increased 86 percent to £4.6 billion and pretax profit at its British retail business dropped 61 percent. At Barclays Capital, its investment-banking unit, earnings rose to £1.05 billion from £524 million.
Barclays is benefiting from an expansion into investment banking services; it bought Lehman Brothers’ American businesses and has been hiring senior bankers in Europe and Asia this year.
Robert E. Diamond Jr., president of Barclays, said Barclays Capital’s expansion is about two-thirds done “but more is to do in Asia.” He expects income from the cash-equities and advisory business to continue to grow and said the pipeline for financing, fixed-income and risk management services is “very big.”
Barclays, which said it planned to resume paying dividends before the end of this year, struck a note of caution Monday, predicting that loan losses will continue to go hand-in-hand with unemployment rates. “We expect the remainder of 2009 to be challenging,” John Varley, the bank’s chief executive, said in a statement. “We expect credit-market losses to be lower than in the first half but impairment trends to be consistent with those experienced over the first half.”
Stephen Green, HSBC’s chairman, was more optimistic when he said that “it may be that we have passed, or are about to pass, the bottom of the cycle in the financial markets.”
http://www.nytimes.com/2009/08/04/business/global/04banks.html?ref=business
Markets Rise on Signs of Economic Growth
Markets Rise on Signs of Economic Growth
By JACK HEALY
Published: August 3, 2009
For thousands of investors whose portfolios are benchmarked to the Standard & Poor’s 500-stock index, recovery was a thing with four digits on Monday.
The closely watched stock index closed above 1,000 for the first time since Election Day, hardening beliefs that stock markets would continue to march higher as the recession shows signs of bottoming. Like other market gauges, the S.&P. 500 is still off more than a third from its all-time highs, but it has soared from its bear-market lows and is now up 11 percent for the year.
The day’s gains added more momentum to a three-week surge that lifted the Dow above 9,000 points as banks and major corporations showed they could still turn profits even as job losses mounted and the prospects for near-term economic growth remained cloudy.
Waves of optimism about global industry lifted the price of oil, grains metals and other commodities, as traders bet that a recovery would drive global consumption higher and revive the demand for raw materials.
Automakers were reaping a boost in sales from the government’s “cash for clunkers” program, which gives credits to motorists who trade in their cars for new, more fuel efficient ones. The Ford Motor Company reported that sales rose 2.3 percent in July, its first monthly sales increase since 2007.
Shares of Ford gained 4 percent, and American-traded shares of foreign car companies Toyota, Nissan and Honda were all higher.
Analysts said the deluge of subsidized auto sales unmasked a sign of economic recovery: pent-up consumer demand. Although consumer spending fell at a rate of 1.2 percent during the spring, consumers are more confident than they were last winter, and they are still willing to spend money when enticed by a bargain.
“The key here is, where’s the consumer mindset?” said Marc Pado, market strategist at Cantor Fitzgerald. “Consumers, when they perceive the bottom, are willing to jump out and buy high priced durable goods. The consumer’s getting hungry.”
Signs of improvement the industrial sectors of China, Europe and Britain bolstered stock markets in Asia, London, Paris and Frankfurt. And more positive readings on manufacturing and the housing market in the United States propelled stock markets on Wall Street toward their highest levels of the year.
The Dow Jones industrial average was gained 114.95 points or 1.25 percent to end at 9,286.56, also the best close since early November. The S.&P. 500 rose 15.15 points or 1.53 percent to close at 1,002.63. The Nasdaq composite index gained 1.5 percent to cross above the 2,000-point threshold, a line it had not breached since early October.
Leading the way were companies that sell oil and natural gas, and those that manufacture basic materials like steel, paper products or plastic. Investors rushed to buy their shares as the price of oil rose more than $2, to nearly $72 a barrel, and the prices of gold and copper also surged.
But the stock market’s gains were the dollar’s losses — and the Treasury market’s.
The dollar index, which weighs the currency’s value against six major currencies, fell to its lowest levels since late September.
The price of 10-year Treasury notes fell XXXX to XXXX as investors anticipating an economy recovery sought out higher yielding investments. The yield on the 10-year note, which moves in the opposite direction of price, rose to 3.64 percent from 3.48 percent late Friday.A surprising, though slender, 0.3 percent increase in construction spending in June also leavened the mood on Wall Street and offered optimistic forecasters another sign that the housing market was near bottom, if not already staging a recovery.
Builders spent more money in June to construct new homes, hotel projects, commercial centers and other projects, the Commerce Department reported on Monday. Part of the overall rise came from a 1 percent increase in government construction spending as stimulus projects began to get under way.
And the Institute for Supply Management reported that manufacturing activity contracted at its slowest pace since last August as businesses reported more orders and higher production than previous months, and improvements in employment conditions. The group’s manufacturing index rose to 48.9 in July, from 44.8 a month earlier.
“This is good news, though we still can’t be sure if further sustained strength is possible in the face of continued consumer deleveraging,” Ian Shepherdson, chief United States economist at High Frequency Economics, wrote in a research note. “This could just be a catch-up after the post-Lehman disaster.”
http://www.nytimes.com/2009/08/04/business/04markets.html?ref=business
HSBC first-half profits fall 51pc as bad debts soar
HSBC first-half profits fall 51pc as bad debts soar
HSBC said profits had more than halved in the first six months of the year, after bad-debt charges soared.
By Telegraph Staff
Published: 10:07AM BST 03 Aug 2009
HSBC Hldgs
The 51pc drop in pre-tax profits to $5bn (£2.98bn) came after its bad debt charges soared 39pc to $13.9bn, the bank reported on Monday.
Rival Barclays said earlier this morning its profits climbed 8pc to £2.98bn for the same period.
Related Articles
HSBC shows pedestrian is good
VIDEO: Business Bullet: August 3 PM
Britannia profits take hit from bad debts
Market relief as BT numbers better than feared
Anglo Platinum extends loan from Anglo American as debt rises
The intervention that saved the West Bromwich Building Society
HSBC raised $17.8bn in a rights issue in April to shore up its capital position, and it had a Tier 1 ratio of 10.1pc at the end of the first half. The bank has had to make some $67bn of bad loan provisions in the last three and a half years, in part because of its purchase of US subprime lender Household International in 2003.
“It may be that we have passed, or are about to pass the bottom of the cycle in the financial markets,” HSBC chairman Stephen Green said in the statement. “Operating conditions in the financial sector have continued to improve as the effects of government and central bank policies work through the system.”
In its global banking and markets business, profit before tax more than doubled to $6.3bn on an increase in currency trading and underwriting bond sales.
The shares were up 3.1pc to 624.6p in morning trading.
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5964507/HSBC-first-half-profits-fall-51pc-as-bad-debts-soar.html
Traders bet on continuing stock market rally
Traders bet on continuing stock market rally
The recent stock market rally could continue this week, as traders increase their bullish positions in a wide range of asset classes.
By Garry White
Published: 11:07PM BST 02 Aug 2009
The FTSE 100 had its best month in more than six years in July, boosted by a number of better-than-expected corporate earnings releases and hopes that the worst of the recession was now over. Derivatives traders are now betting that improving conditions would result in further price rises in metals and soft commodities.
Commodity prices have risen sharply this month after economic data improved and the dollar slid to its lowest level in 2009 – and further rises are now expected.
Related Articles
FTSE 100 closes at year high
FTSE 100 hits new high for year
Commodity prices set to rise further, Roubini says
The copper price, which is seen as a leading indicator of future economic growth, rose for a seventh-straight month over the course of July. Aluminium prices put in their highest monthly gain since 1988.
The FTSE 100 is heavily exposed to mining and oil groups, with about 30pc of its weighting made up by global commodity plays such as BHP Billiton, BP and Fresnillo.
Last week, earnings reports from the likes of AstraZeneca, Pearson and Cadburys pleased as cost-cutting measures made businesses leaner and positioned them well for an economic upturn.
There is the potential for any rally to derail, however, as earnings are released this week by the major UK banks and insurers.
However, US derivative traders and hedge funds have bet that the recent rally in many asset classes will continue, data from the US Commodity Futures Trading Commission (CFTC) reveal.
In the week to July 28, traders increased bets that the price of a wide range of commodities will continue to rise. When more traders are using futures contracts to bet on a price rise than on a price fall a so-called "net long" position is created.
Last week an increase in the net long position was seen in a wide range of contracts, including crude oil, heating oil, platinum, orange juice, cocoa, sugar, corn, hogs, soymeal, cattle and silver, while the net short position in copper, which means more traders expect a fall in prices than expect a rise, was reduced. Bets on a rise in the cotton and gold price fell slightly.
The data was compiled before Friday's positive reading on US second-quarter GDP, which fell 1pc year-on-year compared with expectations of a 1.5pc fall.
"The outlook for base metal prices is growing more positive," says Gayle Berry, an analyst at Barclays Capital. However, she thinks that Chinese buying of copper is likely to moderate in the second half of the year, after the country's imports doubled in the first half.
The FTSE 100 index of leading shares climbed 8.5pc in July, adding £134bn to the value of the stock market.
http://www.telegraph.co.uk/finance/markets/5961931/Traders-bet-on-continuing-stock-market-rally.html
The recent stock market rally could continue this week, as traders increase their bullish positions in a wide range of asset classes.
By Garry White
Published: 11:07PM BST 02 Aug 2009
The FTSE 100 had its best month in more than six years in July, boosted by a number of better-than-expected corporate earnings releases and hopes that the worst of the recession was now over. Derivatives traders are now betting that improving conditions would result in further price rises in metals and soft commodities.
Commodity prices have risen sharply this month after economic data improved and the dollar slid to its lowest level in 2009 – and further rises are now expected.
Related Articles
FTSE 100 closes at year high
FTSE 100 hits new high for year
Commodity prices set to rise further, Roubini says
The copper price, which is seen as a leading indicator of future economic growth, rose for a seventh-straight month over the course of July. Aluminium prices put in their highest monthly gain since 1988.
The FTSE 100 is heavily exposed to mining and oil groups, with about 30pc of its weighting made up by global commodity plays such as BHP Billiton, BP and Fresnillo.
Last week, earnings reports from the likes of AstraZeneca, Pearson and Cadburys pleased as cost-cutting measures made businesses leaner and positioned them well for an economic upturn.
There is the potential for any rally to derail, however, as earnings are released this week by the major UK banks and insurers.
However, US derivative traders and hedge funds have bet that the recent rally in many asset classes will continue, data from the US Commodity Futures Trading Commission (CFTC) reveal.
In the week to July 28, traders increased bets that the price of a wide range of commodities will continue to rise. When more traders are using futures contracts to bet on a price rise than on a price fall a so-called "net long" position is created.
Last week an increase in the net long position was seen in a wide range of contracts, including crude oil, heating oil, platinum, orange juice, cocoa, sugar, corn, hogs, soymeal, cattle and silver, while the net short position in copper, which means more traders expect a fall in prices than expect a rise, was reduced. Bets on a rise in the cotton and gold price fell slightly.
The data was compiled before Friday's positive reading on US second-quarter GDP, which fell 1pc year-on-year compared with expectations of a 1.5pc fall.
"The outlook for base metal prices is growing more positive," says Gayle Berry, an analyst at Barclays Capital. However, she thinks that Chinese buying of copper is likely to moderate in the second half of the year, after the country's imports doubled in the first half.
The FTSE 100 index of leading shares climbed 8.5pc in July, adding £134bn to the value of the stock market.
http://www.telegraph.co.uk/finance/markets/5961931/Traders-bet-on-continuing-stock-market-rally.html
Pound soars after manufacturing sector grows for first time in a year
Pound soars after manufacturing sector grows for first time in a year
The pound leapt against world currencies after an unexpected surge from the manufacturing sector sparked speculation that the Bank of England will freeze its quantitative easing (QE) programme later this week.
By Edmund Conway, Economics Editor
Published: 6:46PM BST 03 Aug 2009
Sterling rose by 3½ cents against the dollar to $1.6928 after new survey data showed that manufacturing industry is growing again for the first time in more than a year. The Purchasing Manager's Index (PMI) for the sector, produced by Markit, rose from an upwardly-revised 47.4 points to 50.8 points in July. It is the first time it has surpassed the 50-level, which separates expansion from contraction, since March 2008.
The increase, which was far beyond what economists had anticipated, pushed sterling higher, along with gilt yields, since the PMI has often been a reliable signal for official measures of economic growth.
Related Articles
Nine months before we see effects of £125bn quantitative easing, says Bank of England
Prices charged by UK manufacturers unexpectedly falls in June
Blanchflower warns Bank of England against raising rates too quickly
China is right to fear US dollar debauchery
Interest rates: MPC to keep rates at 0.5pc
The Bank will decide on Thursday whether to extend its QE programme to beyond £125bn, based on whether it judges it has pumped enough stimulus into the economy.
James Knightley, of ING, said that the increase was consistent with the economy growing by 1pc year-on-year in the second half of 2009. "This suggests that the UK economy is likely to record positive growth through the rest of this year and into next," he said. "However, ongoing deleveraging and rising unemployment (the PMI employment component still shows job losses) still suggests that the recovery will be fragile."
The positive economic news coincided with another strong day for markets, which were also boosted by news of strong investment banking profits from Barclays and HSBC. The FTSE 100 rose by 74.1 to 4682.46 points, having already achieved its biggest monthly gain in six years during July.
In a further sign of recovery, the TED spread, a measure of financial market stress which calculates the difference between banks' cost of borrowing and US Treasury interest rates, dropped beneath the 30 basis point level for the first time since before the onset of the financial crisis in mid-2007.
http://www.telegraph.co.uk/finance/currency/5967561/Pound-soars-after-manufacturing-sector-grows-for-first-time-in-a-year.html
The pound leapt against world currencies after an unexpected surge from the manufacturing sector sparked speculation that the Bank of England will freeze its quantitative easing (QE) programme later this week.
By Edmund Conway, Economics Editor
Published: 6:46PM BST 03 Aug 2009
Sterling rose by 3½ cents against the dollar to $1.6928 after new survey data showed that manufacturing industry is growing again for the first time in more than a year. The Purchasing Manager's Index (PMI) for the sector, produced by Markit, rose from an upwardly-revised 47.4 points to 50.8 points in July. It is the first time it has surpassed the 50-level, which separates expansion from contraction, since March 2008.
The increase, which was far beyond what economists had anticipated, pushed sterling higher, along with gilt yields, since the PMI has often been a reliable signal for official measures of economic growth.
Related Articles
Nine months before we see effects of £125bn quantitative easing, says Bank of England
Prices charged by UK manufacturers unexpectedly falls in June
Blanchflower warns Bank of England against raising rates too quickly
China is right to fear US dollar debauchery
Interest rates: MPC to keep rates at 0.5pc
The Bank will decide on Thursday whether to extend its QE programme to beyond £125bn, based on whether it judges it has pumped enough stimulus into the economy.
James Knightley, of ING, said that the increase was consistent with the economy growing by 1pc year-on-year in the second half of 2009. "This suggests that the UK economy is likely to record positive growth through the rest of this year and into next," he said. "However, ongoing deleveraging and rising unemployment (the PMI employment component still shows job losses) still suggests that the recovery will be fragile."
The positive economic news coincided with another strong day for markets, which were also boosted by news of strong investment banking profits from Barclays and HSBC. The FTSE 100 rose by 74.1 to 4682.46 points, having already achieved its biggest monthly gain in six years during July.
In a further sign of recovery, the TED spread, a measure of financial market stress which calculates the difference between banks' cost of borrowing and US Treasury interest rates, dropped beneath the 30 basis point level for the first time since before the onset of the financial crisis in mid-2007.
http://www.telegraph.co.uk/finance/currency/5967561/Pound-soars-after-manufacturing-sector-grows-for-first-time-in-a-year.html
HSBC is a great business – but buy Standard Chartered
HSBC is a great business – but buy Standard Chartered
By Garry White
Published: 5:17PM BST 03 Aug 2009
HSBC
635.9p +30.15
Related Articles
Baldrick banks could be wrong to look overseas
Stephen Hester plots RBS's path to stability
Shanghai surprise
HSBC has 'no plans' to use Government funds
Canadian trade buyer builds stake in SIG
Questor says AVOID
This column has shied away from recommending Western banks over the last six months, as there were too many uncertainties in their balance sheets. The full impact of bad loans has not worked its way through the system and there are a number of new regulatory hoops that look likely to be imposed. Caution continues to be the order of the day.
HSBC did not need to take government funds when other institutions were crumbling at the foundations, although it tapped existing shareholders for more money through a rights issue in April, raising $17.8bn (£10.5bn). This is a major positive for the group.
Yesterday's first-half report was relatively reassuring. Pre-tax profits in the six-month period to June 30 fell 51pc to $5bn on a year-on-year basis on revenues that were 10pc ahead of last year. Reassuringly, its Tier One ratio rose to 10.1pc from 8.3pc six months ago.
This is ahead of the 7.5pc – 10pc range targeted by the bank, with most of this extra funding coming from the group's cash call earlier this year.
HSBC still owns Household in the US – a sub-prime lender. The company paid $15bn for the business in 2003 and the bank – after defending the purchase for quite some time – admitted that it has made a mistake earlier this year. "With the benefit of hindsight, this is an acquisition we wish we had not undertaken," Stephen Green, HSBC's chairman, said in March.
Rising bad debts in the US, Europe and Asia forced the bank to write off $13.9bn, which was one-third higher than in the same period last year. This is a lot of money – even for a bank of the size of HSBC. The bank has had to make some $67bn of bad loan provisions in the last three-and-a-half years, most of these associated with Household.
Although there is the suggestion that bad debts could have peaked, this may not be the case. If you look at the stock market's recent performance, you would think that the future is rosy and bright. It is not. Unemployment looks set to rise and bad debts are going to take some time to work their way through they system. This is the main reason Questor is cautious
It is easy to argue that HSBC is managed better than most other "western" banks – because it's probably true – and there is no doubt that it has a great future ahead of it. The company's heavy exposure to Asia is a real positive.
However, it's a question of valuation. The shares have rallied substantially from their lows, more than doubling since March. This means that the shares are trading on a December 2009 earnings multiple of 28.6, falling to 21.5 next year and 13.8 in 2011. This looks pretty steep. The shares are only yielding 3pc as well, which is hardly earth shattering when compared to some of the dividend plays we have in the Questor portfolio such as Northern Foods (7.4pc) and BP (6.8pc).
Questor advises readers to buy shares in Standard Chartered instead. The bank was recommended when its shares were at £12.40 and they are now 18pc ahead of their initial recommendation price.
The shares are yielding just 2.4pc this year, but this is not a share to buy for income, it's a share to buy for long-term growth. The company operates in markets that have significant growth ahead and is heavily exposed to the Middle East. It escaped the collapse in global financial markets relatively unscathed and it is trading on a December 2009 earnings multiple of 15.7 times.
Standard Chartered publishes its interim figures today. Consensus is for earnings per share of 91 cents, with a range of 80 cents to $1.07.
So, although things are looking relatively good for HSBC, concerns about bad debts remains and the valuation looks pretty rich. Questor advises avoiding shares in HSBC for now, playing the banking sector through Standard Chartered which is highly geared to most of the long-term growth markets in the world.
http://www.telegraph.co.uk/finance/markets/questor/5967064/iHSBC-is-a-great-business-i-but-buy-Standard-Chartered.html
By Garry White
Published: 5:17PM BST 03 Aug 2009
HSBC
635.9p +30.15
Related Articles
Baldrick banks could be wrong to look overseas
Stephen Hester plots RBS's path to stability
Shanghai surprise
HSBC has 'no plans' to use Government funds
Canadian trade buyer builds stake in SIG
Questor says AVOID
This column has shied away from recommending Western banks over the last six months, as there were too many uncertainties in their balance sheets. The full impact of bad loans has not worked its way through the system and there are a number of new regulatory hoops that look likely to be imposed. Caution continues to be the order of the day.
HSBC did not need to take government funds when other institutions were crumbling at the foundations, although it tapped existing shareholders for more money through a rights issue in April, raising $17.8bn (£10.5bn). This is a major positive for the group.
Yesterday's first-half report was relatively reassuring. Pre-tax profits in the six-month period to June 30 fell 51pc to $5bn on a year-on-year basis on revenues that were 10pc ahead of last year. Reassuringly, its Tier One ratio rose to 10.1pc from 8.3pc six months ago.
This is ahead of the 7.5pc – 10pc range targeted by the bank, with most of this extra funding coming from the group's cash call earlier this year.
HSBC still owns Household in the US – a sub-prime lender. The company paid $15bn for the business in 2003 and the bank – after defending the purchase for quite some time – admitted that it has made a mistake earlier this year. "With the benefit of hindsight, this is an acquisition we wish we had not undertaken," Stephen Green, HSBC's chairman, said in March.
Rising bad debts in the US, Europe and Asia forced the bank to write off $13.9bn, which was one-third higher than in the same period last year. This is a lot of money – even for a bank of the size of HSBC. The bank has had to make some $67bn of bad loan provisions in the last three-and-a-half years, most of these associated with Household.
Although there is the suggestion that bad debts could have peaked, this may not be the case. If you look at the stock market's recent performance, you would think that the future is rosy and bright. It is not. Unemployment looks set to rise and bad debts are going to take some time to work their way through they system. This is the main reason Questor is cautious
It is easy to argue that HSBC is managed better than most other "western" banks – because it's probably true – and there is no doubt that it has a great future ahead of it. The company's heavy exposure to Asia is a real positive.
However, it's a question of valuation. The shares have rallied substantially from their lows, more than doubling since March. This means that the shares are trading on a December 2009 earnings multiple of 28.6, falling to 21.5 next year and 13.8 in 2011. This looks pretty steep. The shares are only yielding 3pc as well, which is hardly earth shattering when compared to some of the dividend plays we have in the Questor portfolio such as Northern Foods (7.4pc) and BP (6.8pc).
Questor advises readers to buy shares in Standard Chartered instead. The bank was recommended when its shares were at £12.40 and they are now 18pc ahead of their initial recommendation price.
The shares are yielding just 2.4pc this year, but this is not a share to buy for income, it's a share to buy for long-term growth. The company operates in markets that have significant growth ahead and is heavily exposed to the Middle East. It escaped the collapse in global financial markets relatively unscathed and it is trading on a December 2009 earnings multiple of 15.7 times.
Standard Chartered publishes its interim figures today. Consensus is for earnings per share of 91 cents, with a range of 80 cents to $1.07.
So, although things are looking relatively good for HSBC, concerns about bad debts remains and the valuation looks pretty rich. Questor advises avoiding shares in HSBC for now, playing the banking sector through Standard Chartered which is highly geared to most of the long-term growth markets in the world.
http://www.telegraph.co.uk/finance/markets/questor/5967064/iHSBC-is-a-great-business-i-but-buy-Standard-Chartered.html
Subscribe to:
Posts (Atom)