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QuestionsCategory: Investor PsychologyDBS and other banks valuation
Theodore Tan asked 1 year ago

Hi Victor and team,
https://secure.fundsupermart.com/fsm/stocks/factsheet/SGX.D05/DBS
I notice that DBS doesn’t hold cash from the above results.
Can I say that the
Net debt per share is literally (Total liabilities/Outstanding shares) = 527,147.00/2555 = $206 per share
I am asking this because I want to calculate my margin of safety as per below. Thanks!
[(Intrinsic Value – Share Price + Net Debt per Share) /Intrinsic Value] × 100%

1 Answers
Victor Chng answered 1 year ago

Hi Theodore,
 
The investment quadrant process is unable to analyse banks as it is a total different type of analysis and financial ratio. 

Victor Chng replied 1 year ago

Other companies like financial companies, REITs and insurance are also not able to use investment quadrant process.

Siew Yean Lim replied 1 year ago

Why financial and insurance companies are not able to use IQ process?

Victor Chng replied 1 year ago

Hi Siew Yean,

The way to analyse and the type of financial ratio for banks, financial and insurance are totally different. For instance, normal operating company, having more cash is good but for banks having more cash is bad as their job is to lend out the money.

Theodore Tan replied 1 year ago

Hi Victor, I think all of us are interested in instrinsic value of DBS and other banks now.
mind sharing? how to calculate that?

Victor Chng replied 1 year ago

You can use PB ratio for banks, just plot the PB chart like how you plot PE chart.

Theodore Tan replied 1 year ago

Thanks! I actually chance upon a way to calculate via this link. I thought it was pretty good. Manage to price ICBC using this method.
https://thetaoofwealth.files.wordpress.com/2015/01/how-do-you-calculate-a-banks-intrinsic-value-by-geoff-gannon.pdf

It prices ICBC’s instrinsic value at HKD 4.68 but priced DBS at SGD 40!
By doing this calculation, I understand why you said IQ process seems different!

Thank for your answer above also!

Theodore Tan replied 1 year ago

Hi Victor,

Can I reconfirm that you mean

Instrinsic value = Average P/B ratio (5 years) x Average Book value (5 years)

Many thanks for your patience and guidance!

Victor Chng replied 1 year ago

Hi Theodore,

Use the latest book value and multiply by average PB because banks book value consistently increasing. We use average book value when the company book value is cyclical in nature.

On the other hand, bank are semi-cyclic in nature so you should use 10 years average PB ratio instead of 5 years as it will capture the semi-cyclic pattern.