Personal notes on banking industry
Personal notes on
banking industry
After allocating a substantial amount of war-chest into equity markets, it is time to stand down and observe the macro-economic events (trade war) that may affect the financial performance of underlying real businesses. The Federal Reserve is yet again doing a fine job of managing expectations of global participants by engaging in double speak. As the saying goes, if you can't convince, confuse.
As I have no crystal ball to foresee the future, I shall consolidate my notes on the banking sector so that I will be prepared to capitalize on any opportunities that may materialize based on the latest Fed moves. Richard Tay Jun Hao had recently provided an useful web seminar on the banking sector and I shall amalgamate the lessons I learnt from his sharing with my personal knowledge base to better identify the better performing local and foreign banks.
After allocating a substantial amount of war-chest into equity markets, it is time to stand down and observe the macro-economic events (trade war) that may affect the financial performance of underlying real businesses. The Federal Reserve is yet again doing a fine job of managing expectations of global participants by engaging in double speak. As the saying goes, if you can't convince, confuse.
As I have no crystal ball to foresee the future, I shall consolidate my notes on the banking sector so that I will be prepared to capitalize on any opportunities that may materialize based on the latest Fed moves. Richard Tay Jun Hao had recently provided an useful web seminar on the banking sector and I shall amalgamate the lessons I learnt from his sharing with my personal knowledge base to better identify the better performing local and foreign banks.
1) Business Model
Net Interest Income = Interest income – interest expense
Net interest margin = Net interest income / Interest bearing asset x 100%
Borrow at 0.05% and lend at 24%. => Credit cards are high margin businesses.
Size, stickiness and quality of savings deposits.
Size and quality of loan book.
Non-Interest Income
Investment and Custody Banking
Trading commission, brokerage and clearing
Safekeeping and custody fees (AUM)
Investment banking and consultancy fees
Commercial and Retail
Banking
Wealth management
Transaction services
Loan related fees / Trade finance
Credit Cards
Out of pocket expenses
Insurance Services (OCBC)
Insurance related Fees + Portfolio management Fees + Float
2) Quantitative Valuation and Performance Metrics
Low PE ratio and good earnings growth
Low P/B ratio and high NAV (Mark to market).
High equity to asset ratio.
Strong deposit base.
Low NPL, Increasing size of Loan Book and Loan growth (Net interest Income)
ROA and ROE
EPS and OCF
Interest rate margin
Dividend Per share and Dividend History
3) Qualitative Metrics
Organic growth
<reduce costs; raise prices; expand into new markets; sell more in old markets; or revitalize, close, or sell a losing operation, >
Inorganic Growth
Smart disciplined Acquisitions and not overpaying
Quality of acquired assets (Acquiring Cash rather than goodwill)
Others
i) Interest rate policy by central banks (Interest rate cyclical) and reserve ratio
ii) Economic conditions (Loan Book size and quality, property cooling measures, demographics of spenders and savers)
iii) Exposure and quality of assets (Cash and deposits preferred)
Quality of loan book and Risky Non-performing loans (illiquid property, construction loans, commercial loans)
iv) Conservative accounting (can be more aggressive)=> High Loan loss reserve and High proportion of safe assets (Treasury bonds and cash)
Ample of room for reinstatement of financials => Track record and Integrity of management
Risk management in loans, Cost discipline and management attitude.
v) Launch of competitive and innovative products.
Identification of Structural decline vs Cyclical Decline, Blue chip VS Blue-Black Chip
Share buyback and insider buying.
Wealth management
Transaction services
Loan related fees / Trade finance
Credit Cards
Out of pocket expenses
Insurance Services (OCBC)
Insurance related Fees + Portfolio management Fees + Float
2) Quantitative Valuation and Performance Metrics
Low PE ratio and good earnings growth
Low P/B ratio and high NAV (Mark to market).
High equity to asset ratio.
Strong deposit base.
Low NPL, Increasing size of Loan Book and Loan growth (Net interest Income)
ROA and ROE
EPS and OCF
Interest rate margin
Dividend Per share and Dividend History
3) Qualitative Metrics
Organic growth
<reduce costs; raise prices; expand into new markets; sell more in old markets; or revitalize, close, or sell a losing operation, >
Inorganic Growth
Smart disciplined Acquisitions and not overpaying
Quality of acquired assets (Acquiring Cash rather than goodwill)
Others
i) Interest rate policy by central banks (Interest rate cyclical) and reserve ratio
ii) Economic conditions (Loan Book size and quality, property cooling measures, demographics of spenders and savers)
iii) Exposure and quality of assets (Cash and deposits preferred)
Quality of loan book and Risky Non-performing loans (illiquid property, construction loans, commercial loans)
iv) Conservative accounting (can be more aggressive)=> High Loan loss reserve and High proportion of safe assets (Treasury bonds and cash)
Ample of room for reinstatement of financials => Track record and Integrity of management
Risk management in loans, Cost discipline and management attitude.
v) Launch of competitive and innovative products.
Identification of Structural decline vs Cyclical Decline, Blue chip VS Blue-Black Chip
Share buyback and insider buying.
4) Assessment of risk
exposure of 3 banks
DBS (More Aggressive loan book, aggressive acquisitions of deposits via DBS multiplier account, Possible higher returns and NPL, Higher Dividend Pay-out ratio)
UOB (Not familiar yet)
OCBC (Most Capital, more defensive, Wing Hang Hong Kong / China exposure, Access to insurance float, portfolio value subject to mark to market)
Sources
Richard Tay (Jun Hao) Notes on Singapore Banks
https://investingacademy.teachable.com/courses/investment-case-studies/lectures/10640793
Peter Lynch
Beat the Street – Chapter 13 – A closer look at the Savings and loans
DBS (More Aggressive loan book, aggressive acquisitions of deposits via DBS multiplier account, Possible higher returns and NPL, Higher Dividend Pay-out ratio)
UOB (Not familiar yet)
OCBC (Most Capital, more defensive, Wing Hang Hong Kong / China exposure, Access to insurance float, portfolio value subject to mark to market)
Sources
Richard Tay (Jun Hao) Notes on Singapore Banks
https://investingacademy.teachable.com/courses/investment-case-studies/lectures/10640793
Peter Lynch
Beat the Street – Chapter 13 – A closer look at the Savings and loans
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