1) Do u know that Banks are not valued based on PE but rather P/BV? The main determinants to prescribe the P/BV multiple is the Bank's ROE. 2) You can;t look at operating CF basis to determine the Bank's healthy liquidity position. For liquidity, u should assess its LCR. Alternatively, u still can look at the traditional LDR ratio.
Hmmmm.... Anyone who simply just uses p/e as a valuation measure of banks is either a new investor, or someone who didn't know how to value banks. You have to look at it's book value, and the quality of it's book. As most banks are very closely related to a high degree, you have to be more discerning in the metrics you use to measure.
The starting point to look at the Bank's quality is their credit rating.
Strong credit rating will helps in favourable loan pricing, attracts more sticky deposits (e.g. during crisis times, u will notice a flight to safety, deposits flowing to Singapore banks for example), assess to cheap source of funding/ample liquidity. It's about credit spread, managing liquidity and capital position.
Relevant financial ratios to look at are ROE, NIM, LCR, NSFR, LDR,capital ratios.
Banks will only go bust due to 2 things - liquidity crunch or lack of capital.Banks are required to meet certain thresholds (1. LCR for 30 days liquidity position. if u cant survive the first 30 days u will go bust. 2. minimum capital ratios. on top of that regulators also require to build up capital buffer during normal times to survive in the event of economic crisis).
In terms of risk management, you can read their Basel Pillar 3 Disclosures in the Annual Report. 3 main Pillar 1 risks - credit, market and operational risks. There are other Pillar 2 risks that regulator look at to such as interest rate risk in banking book.
Are there any excessive risk taking? look at return on risk weighted assets (instead of ROE).
how to know if the Bank is being conservative? look at its loan loss coverage.
anyway, if u intend to invest in a Bank, pls note that those old days of high ROE is gone.
with Basel reform (stringent rules on liquidity, structural funding profile, maintaning adequate capital buffer) and new accounting standards (new loan provisioning methodology), it is inevitable that Bank's ROE and NIM to trend lower.
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Fabien Extraordinaire
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Posted by Fabien Extraordinaire > 2019-02-09 10:31 | Report Abuse
What;s the point of this article?
1) Do u know that Banks are not valued based on PE but rather P/BV? The main determinants to prescribe the P/BV multiple is the Bank's ROE.
2) You can;t look at operating CF basis to determine the Bank's healthy liquidity position. For liquidity, u should assess its LCR. Alternatively, u still can look at the traditional LDR ratio.