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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: E_K_S who wrote (25088)	10/22/2006 6:24:01 PM
From: Paul Senior	Respond to of 78478

E_K_S. As I say or imply, I've been having a difficult time coming up with formulas to use in picking bank stocks. Roa is an industry standard measure for evaluating bank stocks (I believe), and that's what I'm trying to incorporate. I've not used roe for this sector, and don't have any experience with it here. My investing approach toward banks, and indeed in almost all of my work, is the assumption that at some price every stock (well, almost every stock) is a value. Therefore, to me, there can not be any minimum acceptable roa or roe cutoff number. In other words, I never want to say .8% roa is acceptable (buy or look closer), 1.5% is even better, and .4% roa is terrible, ergo just avoid. These numbers - to me - cannot just stand alone. I'm more than willing to buy a crummy .3% roa bank if the stock price is also low enough. And if I can buy a bank generating a decent 1.5% and IF the price is low enough (which it invariably is not), it's a buy too, for me. The problem I'm having is that I'm not able to refine or develop other measures which put the continuum of roa's and any other factor into a buy or avoid decision. I can do it in rough quadrants for a two factor model using p/bk., but not good enough to make confident decisions. That is, imo, if a stock has high price/book value and high roa, it's roughly not a buy for me. (Because while it's likely a very good bank generating good roa numbers, it's not at bargain price according to my model.) If I can find a stock with a high roa AND low p/bk (a rare combination), I'm willing to buy. And if I can find a stock with low roa and also low p/bk I'm again willing to buy. The problem is, what is "low"? I can only relate "low" for roa and "low" p/bk in very general terms. For example I can't make a definitive decision on .5% roa with 1.5x book, or .8 roa & 1.8% book, etc. etc. As I've said, I need to do some more work in this area, either get more empirical data (perform regression analysis??), use different or additional measures with roa, or something. Can start to get complicated. Too complicated for me.

To: E_K_S who wrote (25088)	10/22/2006 6:25:13 PM
From: Spekulatius	Read Replies (3) \| Respond to of 78478

Community banks valuation - The opinions about the correct valuation of community banks differ. First of all i would distinguish between the "half public" MHC like OSHC, KRNY, CSBK or community banks that have been public for a long time. What matters for banks is tangible capital, not book value, IMO. In most cases the difference is goodwill due to acquisitions. A well managed community bank should be able to achieve a return on assets of at least 1%, which translates into a ROE of about 15% assuming reasonable leverage. The ROA is a better measure than the ROE because it compensates for different leverage. Another value metric I look at is Deposit/ market cap ratio (of course it matters if deposits are growing too). A reasonable valuation is 20% of deposits. This ratio should be more meaningful for an acquirer of a bank than for example book value.Most important is the quality of assets/loans. A rapid rise in nonperforming loans or lan past due is a red flag, IMO.Right now the percentage of nonperforming loans of medium sized community banks is about 0.5%, so I would not like to see values much higher than that.