Banking Sector Valuation Guide

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Nice work hariesha! Thanks!

Thanks mate. It really helpfull. Anyway I have few hunderds of SAMP bought at 205. Although it seems be a right decision I wonder the bottom is yet to come.

hariesha wrote:Some people are complaining about market is overvalued. But look at the actual facts.

You have got lot of encouraging words , “thank you’ s. ( for sharing your worksheet ) But few have commented on your informative ideas. I'll try.

“Colombo average PE is 12.75, bellow most developed markets. Our GDP growth is above 8, most developed countries GDP is below 1.5”

This statement , may be mathematically accurate, but is it possible compare PE of Colombo Market with that of a developed Country ,based on GDP growth rates alone ? .

“What we lack right now is only sentiments. Most shares are trading at all-time low valuations.............pick some valued shares for portfolio building. “

Judging by the sentiments of Forum participants , it is clear , that most of the people are very much optimistic . But it seems most of the existing investors are already tied up with a share portfolio (with diminishing value ) .So they are short of funds to invest in additional shares ( trading @ “ all time low valuations “). This is evidenced by the enthusiasm about lifting of Broker credit controls, arrival new SEC chairman ....etc.
What about people , Institutes, funds who have money to invest ? Why are they not investing now ?
I give below some reasons , which I presume they are considering ....

* Seylan Bank NV is trading far below the asset value.
Sure , this may be an attractive point. But carefully examine the adjustments , revaluations, provisions, write offs, made in Financial Statements of last two / three years , before accepting declared NV.
Also, when you look at the happenings at Seylan Bank in the recent past ( run on the bank, CB intervention, appointment of Govt directors not answerable to shareholders , change of shareholders, VRS of senior management, no .of LT cases of past employees, adjustments in financial statements ) , can you expect any rational investor to invest in Seylan Bank, of all the banks, for long term value ?

• Sampath bank is trading at PE of 6.5X lowest valuations in recent years
Certainly Current PE is unbelievably low , compared to the PE of 13.5 at the peak price of around 300/- in end Jan 2011. Even at that time some of us were of the view that Sampath PE is still attractive. However examine the decline of PE (trailing PE for last 4Q) and compare with the results of each quarter. PE -11 at the end of March qtr, PE -8.5 at the end of June Qtr. PE -7.5 at the end of Sep qtr.

So why people having money, is not buying ? May be, going by the trend , they will expect it to fall below 5, at the end of Dec qtr !!!.

• Union Bank will make huge capital gain on part disposal of The Finance and Guarantee shares. (They are gaining a 500% return within just five months.)
Encouraging news, but do you really think there will be buyers for F & G at that price ( for a former Ceylinco Group company ) ?
Also prospective investors will not forget, , Union bank started trading over 40/- at the opening day ,barely after 6 months price is around 20/-.

* IFC & Commercial Bank structured a landmark US$ 65 mn. (Rs.7.5 bn) facility for financing SMEs in Sri Lanka.
* Within next two weeks two more commercial banks will announce similar facilities with several middle east funds.

Definitely a boon for the banks.
However this type of funding will not result in increasing interest spread in lending. Also to accrue the benefit , bank has to disburse the funds to prospective SME’s. The success of SME sector depend mainly on medium/small scale industrial activities. Is this sector growing ? Are they viable ? How about past deleted ratio s ? Are their concerted effort from policy makers to uplift the sector ( compared to the hype in tourism sector) ? New investors, specially investment funds, will examine these aspects before commitments.
Actually , the constraint to lending ( to SME, large scale industries ) is not lack of funds in Banks. Just examine the balance sheets, and note how much money is invested in treasury /govt bonds . It’s lack of new / expansion projects, which in turn depend on level of economic activities of the Country and potential for growth. ( Which in turn is reflected in the level of activities of share market ? )

Thanks for the good analytical framework Hariesha.

More and more Banks are looking for foreign sources of funds. I think PB Jayasundara is very clear about this and pushing banks to tap overseas rather drain public finances shooting int rates up.

So naturally their bottom lines will improve.

The billion dollar question is if that will reflect in the share price?

thank you for the post

Thanks brother

Thanks for info