ReturnsSo far we've been looking at different aspects of the business separately. All these parts operate together to generate a return. How do we measure the returns generated?
The most common measure is ROE:
This doesn't account for differing leverage that different banks may have, so its used in conjunction with ROA:
ROA doesn't take into account the quality of assets. To do this, we would look at Returns over Risk-Weighted-Assets:
Finally, we can use Revenue over Risk-Weighted-Assets, for cases where the banks have a lot of one-off expenses that affect their returns1:
Why the spike in OCBC's in 2012? They had an one off $1.3bn sale of securities2.
ValuationWe use book value to value banking stocks for two reasons. Firstly, because earnings are highly cyclical. Secondly, because for a financial business, accounting rules require the assets (i.e.: loans) on the balance sheet to be constantly updated to reflect future earnings3.
Specifically, we use Tangible Book Value (Book Value minus Intangible Assets):
How are the banks valued compared to the past? I have to use simple book value to compare this, since I can't find any past P/TBV values4. Price/BVs over recent downturns were:
Current Price/BVs are close to 1:
ConclusionI would buy either UOB or OCBC, because of their historically high returns and lower write offs.
Would I buy now? Banks stocks have been grinding lower for the last year. They are fairly cheap, though not at crisis levels. If I bought, I would only buy half a position now. No telling when the next recession or crisis will come.
1 Not for these 3 S'pore banks, but may be used when comparing them to other countries' banks.↩
2 Note 7 in 2015 AR. 1.35bn "Disposal of securities classified as availiable-for-sale", which is 27% of PBT. ↩
3 Unlike other businesses where where the amount recorded on the balance sheet is the amount paid minus depreciation.↩
4 To calculate them I would need past stock prices un-adjusted for dividends/splits.↩