Good (Bad) Banks and Good (Bad) Investments: At the right price...
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- เผยแพร่เมื่อ 2 มิ.ย. 2024
- Following up on my last session, where I drew a contract between good and bed banks, in this one, I look at the contrast between a good banking investment and bad one, iwith banking pricing taking center stage. A good bank that you overpay for is a worse investment than a bad bank that you get at a bargain price. I look at intrinsic valuation in the context of a bank, arguing that you can only value equity (as opposed to operating assets or enterprise value) at a bank and then developing a model, based upon regulatory capital, to estimate free cash flows to equity. I also looking at pricing banks, noting the reasons why price to book ratios have deep roots in analyses, and compare banking price to book ratios across time and across the cross section. I close with a pricing of the 25 biggest US banks and disclose that I will be adding Citi, a bank trading at half its book value, a pricing discount that makes this stodgy, low growth bank into a good investment.
Slides: pages.stern.nyu.edu/~adamodar...
Valuation of Citi: pages.stern.nyu.edu/~adamodar...
Thank you so much professor. Can't believe we get to see such high value educational content for free!
i follow your blog for 1 year and its the greatest service i've ever seen. many thanks!!!
Thank you sir for your insightful training videos. Sincerely appreciate for curating the content to cover latest developments.
31:45 I think dividend yield should be dividend and buyback yield here. Jpm does it's full cash yield as dividend and buyback. Majority of the return is the buyback, not the dividend.
Thank you Professor. Stay blessed always.🙏
Sir, Please make the next video with a focus on banks with largest exposure to Commercial Real Estate. Most Pundits are predicting a commercial real estate bubble, a video will help a lot. Many thanks for sharing your wisdom
Thank you professor. you are my star, one day I will meet you and tell you this.
Excellent as always
Very nice and informative video. Thanks for sharing this important video
Subscribed and liked for such valuable information.
Thank you professor, how do you think this valuation model would change for neobanks that maybe involve themselves in a lot more fintech or brokerage services? Would there be a sum-of-parts there? Thank you.
Hello professor. When valuing banks, is it necessary to consider multiple business segments, such as trading and investment banking sectors? After all, income from these sectors is primarily affected by interest rates and overall economic conditions. I don't like these sectors, but I think they must have different costs of equity and reinvestment rates than the loan and deposit sectors. One example is the human capital-the giant salary and bonus banks pay to those investment bankers when the deal is booming.
Great session!
Dear aswath
For the 3D scatter plot, a colour gradient on one or two axes would make it easier to see where the data points belong on the depth scale
Refer to him by The Great Madrasi Valuation Anna and he might actually listen to you.
Aswath Sir you rock:)
Hi Prof, just want to comment that you used median Price to Book ratio in your calculation of Citi’s Cost of Equity. Wouldn’t that mean that you are bringing in an aspect of pricing into your intrinsic valuation?
Re 3-d graph -- I would like to suggest changing it to 2-d graph, while the third dimension is to visualise with bubble sizes. I guess the winners and losers would be visible more explicitly.
Hey Aswath, I’m curious why you wouldn’t include Capital One ($COF) bank in your analysis? It seems like it’d be very attractive based on your metrics of choice
In the Citi model, shouldn't we subtract out dividends from net income to get FCFE. The motivation for this is that Citi is deploying capital in a value destructive manner, ROE < COE. However, the capital citi is redeploying in reality is net income - investments in regulatory capital - dividends paid out, not just net income - investments in regulatory capital. Woulnd't it make more sense to think of FCFE like this while discounting the dividends paid out at the COE and adding the pv of these dividends to equity value?
Great content as always! Profesor Wouldn’t it be reasonable to think that net income will shrink given that: 1) banks have to make investment in digitalization to stay competitive without gaining new clients (this expense i imagine will only increase) 2) fintechs will be taking their lunch by aquiring their best clients and living the banks with higher non payable loans and the same rates. Also when calculating net income write off of bad loans doesn’t go through P&L , what we are considering in the calculation are provision wich are always higher and differ a lot from bank to bank. Shouldn’t we make some type of adjusment so we are not penalizing conservative bank for putting a high level of coverage on their provisions ?
Spot on!
And never mind the fact that the banks giving out riskier loans(requiring greater capital ratio) will also tend to have greater ROE and vice versa.
Is the interest spread in your slide mean the net interest margin? on slide 23, citigroup is 9.39%, that can not be right, JP morgan 6.8%? (may be including the fees revenue) Am I missing something? Thanks.
Hey Prof. I am valuing a regional bank and I have two questions I cannot figure out answers to.
First, in calculating their Tier 1 Capital the bank doesn't add the Accumulated Other Comprehensive Loss coming from the value reduction of Available for Sale Securities ( they don't have any HMS) which substantially reduces Total Equity. CET 1 Ratio is 11% but when I take into account AOCI it is only 6,7% and the losses are going to be higher if interest rates go higher, which is probable. Is it a red flag? They use this rule as an explanation for the way of calculation - Regulatory Capital Rules: Accumulated Other Comprehensive Income (AOCI) Opt-Out Election, March 23, 2015.
Second, when I calculate the Cost of Equity using date from your website: PBV = 1.24, ROE=11,80 and g=3,3% I get the Cost of Equity of 10,15%. I find it counterintuitive that a small bank has a lower Cost of Equity than a large bank like Citi in your Example.
Thanks so much. For some reason, we can no longer access the slides as the server is down.
I bought east west bancorp at 53 happy with my returns
I believe citi has a poor loan book. Banks don't get equity discounts for no reason. An impaired loan book will lower your book value because loans aren't held at fair value. Similar to the insane discount aig has. People don't have faith in the loan book.
Good insight, in fact the problem 2008 crisis had was because of its marketable security quality, that wasnt fairly valued by the bank, government, and even market itself. Not even with Prof valuation method could dismantle the latent harm of bank asset portofolio.
My suggestion is by reviewing the bank biggest holding, look directly at its asset in portfolio, and value it independently
you have another suggestion?
I don't like his simple stickiness metric at the end (th-cam.com/video/CdhTVs36z4c/w-d-xo.html). Low growth in deposits could mean low stickiness. I'm also uncomfortable with Citi having by far the highest interest spread and that being counted a a positive. That could indicate something unsustainable and a cause of (my supposed) low stickiness. It's a potential source of "room to fall". A bank with a low spread and yet moderate on the other metrics (especially if good on ROE and P/BV, and high aka "bad" growth in deposits) might have some good opportunities to increase the spread to improve all the other metrics without sacrificing deposit growth too much.
Why actually to rush buying Citigroup on 09.05.2023, if their ex-dividend date was on 27.04.2023 and payment of dividends in the amount of 0.51$/share is scheduled to happen on 25.05.2023 ? So, to make it explicit -- one does not get dividends, if one buys on 09.05.2023 and if market is halfway rational, dividends are already priced in, and so share should drop by 0.51 on 26.05.2023 ? Any rationale for that ?
Wow excelente
With all due respect professor, love your work but can you address the comments that Warren and Charlie made on your comments that apple as a percentage of BRK was too much
It would have been perfect if you have also provided info regarding the proportion of uninsured deposits to total deposits in the table at the latter part of the video!
I think the main reason Citi has been so much downgraded by the market is because it's proportion of uninsured deposits is very high. Couple that with the around 50% of deposits held to maturity.
They addressed this in their latest reports. A high portion comes from Foreign deposits, which are obviously uninsured
Thank you professor. I have a basic questions: how do you reach the 8.78% current RoE. I calculated 8.147%, even when calculating ROAE averaging 2021 and 2022. You even mention the 8.1% in your last slide with all the numbers
He used Tier 1 Capital as equity
Yay! 4 of the banks I'm invested in made the green P/B list! I have to confess I have no idea how to value a bank, but I know that many good banks are selling for bargain prices. If these turn out to be profitable in the years to come, I'll have to tip my hat to Lady Luck rather than my investment prowess. Thanks Aswath!
No such thing as 'bargain prices'. Everything is priced correctly.
@@tastypymp1287 if everything is priced correctly why are you watching the video? No need to watch if the market is efficient in your eyes.
@@kobyanderson1714 That's not a reason not to watch it.
Try again?
@@kobyanderson1714 Hi reply bot.
How are you today?
Did you take the data for Avg ROE also from S&P Capital IQ?
It's strange. The avg ROE for values from Morningstar, Macrotrends and the one shown in your table - all three are different!
For Morningstar it's 8.8
For Macrotrends it's 7.95
And the one mentioned by you is 9.5 !!!
How can there be such differences in the values of such common metric on different reputable websites???!!!
I just don't understand.
Can anyone please tell me why Charles Schwab is not in the top 25 banks list at the end part of the video ??!!!
Based on the table provided by The Great Madrasi Valuation Anna and the list of top banks with the highest proportion of uninsured deposits at SP Global, I invested in Regional Finance Bank ($RF).
Anyone please tell me how did I do?
Citi is a kind of investment; the expectation is so low, and slight improvement is huge for the valuation and return. The only thing is, will the CEO Jane Fraser can deliver it via efficiency improvement?
i was thinking that the good professor has written a proposal for a cost cutting operations expert to consult for Citi
Hello Professor, great content. Quick query- on slide 12, if I equate ROE = g then PBV will be 0. So, as an example, if a bank is growing at 20% with an ROE of 20% then its PBV = 0. What am I missing here?
You are considering this issue mathematically, but, in fact, it is not totally correct. Most economic formulas are only approximate way of describing reality and they work as worse as more extreme a situation you are regarding. Thus, here you should regard your situation fundamentally.
Your assumption is that ROE = g. This means that your Cash Flows = 0 forever, the only way you can receive your investments (with profits) back is to sell them to another investor (expecting that the buyer is also ready not to receive CF). But, if the company never pays CF (dividends), why do all of you consider that the company has value? Because the company has assets, and we assume that at any point in time we can liquidate this company selling these assets, and their price will be equal to the market value of equity. We can describe this situation (your example with ROE=g) as a term deposit: you put $100 at 10% (with the right to withdraw all the money in any point in time in future), and the question is: what is the price of this deposit in any given point in time? The answer is: it depends on your required rate of return. As long as your required return is equal to the deposit rate, the discounted value of your deposit will be $100 today. But if your discount rate is lower than deposit rate, then the value of your deposit will be as higher as longer you are going to wait to withdraw money, going to the infinity. And contrariwise: if your required rate of return is higher than the deposit rate, the deposit will lose value and its present value will be the lower the higher the term of deposit, going to zero. And the mathematical dependence is:
1) Value = Investment * [(1+required_return)/(1+expected_return)]^n. For example: $100*[1.1/1.09]^5 = $104.7
2) P/B = [(1+required_return)/(1+expected_return)]^n, for example: [1.1/1.09]^5 = 1.047.
But here you can say that it is not fair, because I entered additional parameter - time, but you need the result without this variable. The answer is that your assumptions are not real, because the company can’t operate in such conditions forever. If the business is going to generate the return that is higher, than required rate of return - the company will grow until it becomes too big to generate such a return (but if ROE is less than required return - no one will invest in this company and it will be liquidated). So, in reality, the business will always be volatile, but for our calculations we simplify (average) the situation assuming that in 10-15-20-30 years we calculate terminal value with ROE=required return.
@@Viktor_Shcherbyna Thank you for the detailed note Viktor. I missed the underlying principle of this model- if dividend = 0 then price will also be = 0, which of course is not realistic. Thanks again for taking time out for a stranger on the internet :)
ty
Can you please tell us where we can get the data on 'Percent of HTM Securities' for all banks?
S&P Capital IQ
@@AswathDamodaranonValuation
Thank you Sir!
Am I going mad or is the math in the model on slide 9 circular?
I think so
You should have mentioned some mathematical/statistical summation of x, y and z values of the three dimensional graph for every bank in that graph.
getting an advertisement every 3 mins or so, very hard to watch this
That is very controversial.
Any business that has any growth (meaning it has to retain some earnings, yes, even banks have to retain earnings in order to grow) and has Return on capital(equity) lower than Cost of equity must have negative value, because if you hold it long enough, you would be losing money to opportunity cost, unless you are owning to sell it to someone else for a higher price, which is no different than a speculation.
Does not make much sense to me, what am i missing?
Maybe if the Cost of equity is 25% and the bank does not grow and pays us 15% per year in dividends long enough, that could be the only case where the value of the business is not negative, according to the formulas used in here.
That is actually not true (that a company that earns less than its cost of equity) will have a negative value. It will have a value lower than its invested capital, but remember that if you earn a 6% return on capital (and your cost of capital), you still have positive operating income and cash flows.
@@AswathDamodaranonValuation I appreciate the answer.
Let's now imagine the following scenario:
We have a business that is not publicly traded.
We are assuming that the business will grow at 3% in perpetuity (like in your case with City bank).
We have two options with our cash flows.
1. To reinvest a portion of it back (in order to grow at 3%), and earn that 9% ROE and pay out the rest in dividends or:
2. To invest it elsewhere, wherever we assume we have that 11% opportunity cost.
The further the total capital base grows, the lower the business value goes, as long as we have our cash in it.
So in your particular City case, if they do not pay out everything in dividend specifically, the value of the business at some point will be negative, because the business is growing and we could have invested that capital in a better place.
If the total capital base does not grow, then what you say is absolutely correct.
But in the City case, we should further discount the reinvestments needed for that 3% growth in perpetuity.
Is my thought process here flawed?
And where?
Many thanks for all you are doing, again.
@@hristolakov3563 The math does not agree with you. Work out the numbers. The value of this business = Earnings next year (1-.03/.09)/(.11-.03). That number is definitely not negative. It is true that the value of the business will decline as growth increases, but it will not become negative, unless you introduce a high growth period and make the growth rate =100% a year….
That is clear enough, thank you, Prof.
I guess the missunderstanding in my process comes from ignoring the current value of the assets, as a standalone thing and am just focusing on the earnings power.
@@hristolakov3563
Hats Off to The Great Madrasi Valuation Anna!!!
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I can't download the slides. please share the new link!! Thank you!
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