Which bank is overpriced?

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Which bank is overpriced?

Which bank? It depends on its intrinsic value. Price follows value, generally speaking, without considering the irrationality of market behaviour.

Valuing a bank is not easy. Bank activities include many off balance sheet activities and make it hard to evaluate.  However, this is all we have now as far as an academic analysis is concerned.  We have not taken into consideration here the technical analysis aspect, which we use extensively at FS Securities.

In our analysis, we considered the following:

  1. The income derived from its deposit base;
  2. The growth of its deposit base;
  3. The bank’s Interest Rate Margin – the profit from their main operation: borrowing and lending;
  4. Income from their other financial products such as: business accounts, brokerage accounts, credit cards and so on;
  5. The soundness of its loan portfolio;
  6. Depth and integrity of management;
  7. Favorable geography.


Because all these factors interconnect with one another, they all play their part in engineering earnings power.

According to this analysis, ANZ Bank and NAB are undervalued while CBA and Westpac are overvalued.

VALUATON. Part 2. Comparable analysis

Comparable analysis is another way to value banks. It involves the comparison of valuation multiples for public companies in a peer group (other banks) to those of a target company.

To select the peer group, you should understand the target company’s business. Comparable companies will usually share the similar industry, business, and financial characteristics with the target. You will be able to make the most meaningful comparisons among valuation multiples of companies in the comparable group when peers have similar prospects for growth and return on invested capital (ROIC). It is easy to do in Australia as there are only 4 major banks.

Once you have identified the group, the next step is to collect the necessary information on each comparable company to perform the analysis. You will need their most recent financial reports. Not all 4 banks release their reports at the same time. For example, CBA releases their annual financial reports in August while ANZ Bank releases it in October. In this case, the earnings and revenue should be adjusted (multiplied by growth rate for that period). After calculating individual ratios for all companies in the group, yon can calculate the average for these ratios. Using these average ratios, you can calculate intrinsic value for your target.

According to this analysis, ANZ Bank and NAB are undervalued while CBA and Westpac are overvalued.




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