Some notes on analysing banks from the interview with Brian Johnson (Australia’s #1 banking analyst and head of research at Ord Minnett) in the Super Analysts book.
- Being a good bank analyst isn’t about stock picking, it’s the actual sector call.
- You become a good analyst when you become aware that there is a cycle and how long the cycle is.
- A cycle is longer than 10 years, from 1980 to 1999, 1992 is the only blip. When things turn bad, you normally have about 4-5 years before it actually manifests itself in big losses and significant underperformance.
- When the Australian banks dropped in 1992, the bad lending behind that was done between 1984 and 1989, and the really bad lending was done around 1986. The cause was deregulation following a period of quite strong commercial lending growth, and at the same time as the economy dipped out and capital expenditure actually fell, the banks still felt obliged to meet asset growth targets, so they lent against speculative assets.
Key Fundamentals when Analysing Banks
- Asset growth
- Lending spreads
- Fees (both revenues and costs)
- Non-interest expenses
- Bad debt
- Capital adequacy
- P/B is total irrelevant, banks trade on earnings-based multiples and their yield on sustainable capital.
- P/B may be used as a screen. A low P/B may tell you that a bank is under-earning, and then you have to assess management’s capacity to turn that situation around.