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Which Bank do you own?

Which Bank do you own?

Half of all shareholders in Australia own at least one major bank in their share portfolios. The economics for banks in the last two years have changed dramatically and on several fronts.

First, they are believed to have largely dodged the impact of the GFC. This was predictable, as was the second change – the substantial gain in market share the banks enjoyed as their mortgage origination peers fell like dominoes relying, as they were, on short term wholesale funding and with no deposit base.

For both reasons I mentioned at the end of 2008 and the beginning of 2009 on CNBC that bank prices represented a rare opportunity to own the best businesses you can on an island – a legislated oligopoly that charges people to get their own money in and out.  You can see the video from December 16 here.

There was also another major change that kept analysts on our toes. Dilutionary capital raisings wreaked havoc on the returns on equity and the equity per share for all four majors. Then Westpac, previously the bank with the best business performance, bought St George, and CBA bought ING. NAB has since bid for Axa (at arguably a price that is double the intrinsic value of the Axa) and ANZ…well who knows (read more here)

The effect of all this activity has not changed the fundamental attraction of owning a big four bank on an island of 22 million people who don’t care what you charge them because they cannot be bothered moving to another bank; “they’re all the same”. What has changed however is the future returns on equity for each of the banks and therefore, their intrinsic values.

Here’s my take on each banks’ forecast return on equity range for the next few years and valuation. I have ordered them by profitability in ascending order (ROE range, Intrinsic value):

NAB (11%-15%, $22.08)

ANZ (12.6%-16%, $18.10)

WBC (14.5%-18%, $19.19)

CBA (17.5% – 20.7%, $53.53)

In every case, current prices are well ahead of the current valuation however, I should add that the valuations are based on 2010 estimates and for all four banks, the valuations rise significantly in future years as ROE heads towards the top of each of the ranges given. Given the time frames that I can see, you will be waiting for values to catch up to current prices. NAB and ANZ are the cheapest, but you are buying the new 2nd tier banks. WBC is a better performing bank than ANZ and NAB but its price reflects it and you will be waiting twice as long as the others to catch up.

Many of you have told me you want to keep this blog a little bit of a secret, but let me tell you we will all benefit if we receive contributions and insights from those closer to the coal face of various industries.  So let me encourage you to post your own thoughts and insights and invite anyone else you know (that owns bank shares for example or works in a company that is a competitor to any of those I mention) to do likewise. Do you think you know anyone that owns bank shares and would benefit from this insight? Spread the link.


Posted by Roger Montgomery, 23 December 2009

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.


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    • Hi Tyler,

      Thanks for the question. Check out Buffett’s 1981 letter to shareholders. Its all there. In short I don’t use a dcf but I do calculate the owner cash flow. Before you go worrying about having to do all that, I have not made many if any investments where the same conclusion would not have been reached using the reported returns on equity. Hope that helps. The book will show you how to do the cash flow calcs.

  1. Roger whats your thoughts on NABs proposed acquisition of Northern Rock ?
    I hope they dont overpay for another asset. That AXA deal was rediculous.
    At least a positive is Richard Branson supposed bidding, he doesn’t usually overpay for assets.

  2. Nick Christian

    Hi Roger

    Just a slight typo, ANZ has purchase the remaining portion of ING (not CBA) it didn’t own for 1.76 billion. ING were forced to sell due to due thier woefull management buying of US mortgage backed securities and a A$40 billion government loan.

    ANZ now has around A$45 billion under management.

    • rogermontgomeryinsights

      Thanks for that Nick. I am on holidays but thought I should publicly recognise your superior copy editing skills! I must have been too keenly anticipating the imminent arrival of Santa when I wrote that. I meant to say CBA bought BankWest.

      Thanks again.

  3. Top of the season to you Roger.

    Consensus forecasts I have seen for cba for FY10 are $5.3b NPAT ( a ROE of 16.5% ). A couple of different IV models that I run bring a value of $48.9b & $46.8b for 2010 (3232cps & 3093cps respectively). I’m certainly not questioning your figures and I’m aware you pay a great deal more for your forecasts that I do. Furthermore, how does someone value? Consensus forecast? Long-term historical returns? A mixture? Even though there is a lot of number crunching in gaining an intrinsic value, this is why I believe valuing is still more of an art than science.

    This is how I have the big 4 reinvested over the last few years:
    ANZ 5.6%
    CBA 3.8%
    NAB 4.5%
    WBC 5.2%.
    Dividends a bonus.


  4. I Roger, soory to correct you in your blog but ANZ bought ING, not CBA as you mentioned here.
    Love your work, Australia’s own Buffett!
    Merry Xmas

    • rogermontgomeryinsights

      Hi Mark,

      As I just said to Nick, I should publicly recognise your superior copy editing skills! I must have been too keenly anticipating the imminent arrival of Santa when I wrote that. I meant to say CBA bought BankWest.

      Thanks again for the correction.

  5. I don’t own any banks and was hoping to buy some bank stocks during the GFC. But I didn’t even realise that banks have been down and gone up again. phew!

    Love your insights Roger…

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