Thursday, March 7, 2019

Analysis of Singapore Banks and Finance Firms

As a fundamental investor, I always look at financials statement to analysis if a company is good enough to invest in. However, there is always 2 types of balance sheet we need to take note – The regular one and the Financial Institutions (FI) one.

Normal Balance Sheet
FI Balance Sheet
In the past, if I want to invest in a FI, I used to tell myself – I don’t know how to analyze their financials, let’s skip them!

But as days, weeks, years went past, and you realise that there are numerous financial firms in of Berkshire Hathaway picks, that’s probably an indication for me to start to learn how to analyze a FI financials.

After jotting down a list of criteria and factors, I reduce it to these 4 criteria.

1. Return on Assets (ROA)

Formula: (Net Profit - One-time Gain) / Total Assets x 100%

In my opinion, Return of Assets is the most powerful ratio of them all to calculate the performance of a FI. I believe it is mention by Warren Buffet before (lost track of the write up) and a good indicative ROA is 1%.

For the calculation of ROA, I will remove the one-time gains, such as gains from disposal of subsidiaries or fixed assets, from the earnings figure.

2. Price to Book Ratio

Formula: Share Price / Book Value Per Share

To analyse a stock, I do believe there should be a criterion that relates to the share price in order to indicate if a FI is a good investment at that point in time.

Price to Book ratio is chosen because it looks at the liquidation value of a company.

In the aspect of a financial firm, their assets tends to be more liquid than other companies. Thus, this should be taken into account.

3. Allowance For Doubtful Debt (ADD)

Formula: Allowance For Doubtful Debt / Total Loans & Advances & Receivables x 100%

ADD indicates an FI ability to underwrite the loan applications for its customer. A higher percentage could meant that the credit review for the loan applications is too relax in order to gain market share!

Some companies may not have ADD, and it is not because that their companies are doing really well, but it maybe due to the company's ability to reverse previous years' doubtful debt.

In this case, the ADD is not explicitly stated and we will probably require the annual report to be released before getting the actual information.

4. Net Interest Margin (NIM)

Formula: Interest Income - Interest Expense x 100%

This formula is similar to the Gross Margin and looks at FI's ability to charge more interest to their clients despite providing an almost similar product. This formula relates to a FI's competitive advantage against it competitors.

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The companies selected for review are the following firms:

Banks: DBS, UOB, OCBC
Consumer Finance: Hong Leong Finance, Sing Investment & Finance, Singapura Finance
Diversified Finance Services: IFS Capital

*Do note that Pawnbrokers, IFAST and Net Pacific Financial Holdings are ignored due to their business model.

FI Analysis

From the analysis above, there are a few observations:

1. Higher ROA result in Higher PB ratio. 

I consider ROA to be the most important criteria, but I did not knew it was inversely related to PB ratio.

2. Higher Interest Income Do Not Result in Lower NIM. 

In terms of maths calculation, I thought NIM will definitely be higher if the FI has a lower interest income, but this is not the case.

3. 1-Year Analysis Is Not Sufficient

An analysis of 1 year result is not sufficient to clearly indicate a company's strength or its weakness. More results will be required.

4. ADD % not Significant

There is not much significant difference between the ADD % for the selected FI. A deeper analysis will be required once their annual reports were released.

In Short

Despite the short exercise above, it actually reveals significantly the difference between FI and their target markets.

However, this is just a preliminary review and more analysis will be required if one intends to invest in any FI stated above.

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The author is vested in one of the FI discussed above. 

Please do your due diligence before investing in any FI above.

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