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Global lenders--a bargain at current levels?

Publication Date : 24-09-2012


Beauty, they say, is in the eye of the beholder and nowhere is this truer than in the corporate world where suitors are always on the lookout for a merger made in heaven.

It is here where business marriages are made, or broken up, in the name of adding value to the enterprise.

For value investors, one important yardstick of assessing whether a company is worth investing in is to track how its share price is traded as a proportion of its book value.

The book value is the break-up price a company will fetch if it is dismantled and sold off after paying creditors and the taxman.

So as a rule of thumb, if an investor buys into a stock trading below its price-to-book value, his downside risk should be limited.

At least, that appeared to be the case until the global financial crisis four years ago.

The financial sector is now littered with lenders trading at well below their price-to-book value, which raises a big question: Why are investors not chasing them, even though they purportedly represent good value for money at currently depressed levels?

Bloomberg data shows that global banking giant Citigroup trades only at price-to-book value of 0.54, while Bank of America is even cheaper - at only 0.46 times price-to-book.

This means that the market is valuing the two lenders at only about half of what they are supposed to be worth, if they are broken up and sold off.

It is the same situation in Europe.

In Britain, partly-nationalised Royal Bank of Scotland is valued at only 0.46 times price-to-book, while Barclays and Lloyds Banking Group are slightly ahead - at 0.51 times and 0.59 times respectively.

French and German lenders are similarly depressed in valuation terms. Societe Generale has a price-to-book of only 0.42 times, while BNP Paribas is at 0.66 and Deutsche Bank 0.54.

By contrast, Asian lenders' valuations have stayed above their book values.

Both the Industrial & Commercial Bank of China and China Construction Bank have price-to- book values of about 1.3 times.

Singapore's United Overseas Bank and OCBC Bank are priced at about 1.4 times price-to-book, while DBS is at 1.2 times.

Of course, the usual explanation from analysts is that both the global financial meltdown and its successor, the European sovereign debt crisis, have raised awkward questions about the quality of assets they hold on their balance sheet.

This has in turn made investors leery of taking up big positions.

But signals sent out by the financial institutions themselves may also reinforce the impression that the price they fix on their assets should not be taken at face value.

Take the recent agreement made by Citigroup to sell its stake in a retail brokerage joint-venture to its partner Morgan Stanley.

It valued the business at US$13.5 billion (S$16.5 billion) - closer to the US$9 billion estimate which Morgan Stanley had put on the business than Citi's US$22.5 billion estimate.

To the casual observer, Morgan Stanley would appear to have cut a good deal as the agreed sale price was 40 per cent below the valuation Citi had on its books.

But, as some market pundits observed, this simply confirms that how banks mark their assets on their books has relatively little to do with what those assets are worth on the market.

Still, some would say that a case can be made for long-term investors to put their money into bank stocks if they have the stomach to sit out the roller-coaster that regularly hits them every now and then.

China Construction Bank's boss, Wang Hongzhang, for example, has reportedly said that his bank had 100 billion yuan (S$19.4 billion) available to make an acquisition and might have European lenders among its targets.

If price is the only criterion, European banks would be bargains at current prices. Germany's CommerzBank is valued at only ¤9.5 billion (S$15.1 billion) while giant French lender SocGen is worth only ¤19 billion.

It is a far cry from the sky-high $148 billion that an RBS-led consortium forked out in its ill-fated takeover of Dutch lender ABN Amro five years ago.

But the big question remains: Are global lenders beauties to pursue at current depressed levels?

US$1 = 1.2 Singapore dollar


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