At stock analyst bible camp, one of the ways we are taught to value banks is against their assets per share.
Due to the cyclical nature of profits, which can rise fast in the good times and plunge during the bad times, many analysts prefer the use of assets as a yardstick for value over profits.
Too much growth in assets can be a very bad thing, however. For example, Australia's mortgage market is so competitive that no major bank should be increasing their loan book considerably quicker than any of the other banks.
Each of Australia's biggest banks, including Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd. (ASX: NAB) and Westpac Banking Corp (ASX: WBC) can secure funding for their loans on fairly similar terms.
So if one of them is growing assets (e.g. loans for houses) far quicker than the others it could be a sign of poor lending standards, which is hazardous to a bank's long-term health. However, it could also be a sign of discounted interest rates, to entice new customers, or a marketing drive, which may mean lower profit margins in the short term for longer-term gains.
Is this the most expensive ASX bank stock?
Australia's banks are often cited as having comparatively strong capital structures and prudent lending standards (although that doesn't stop them getting embroiled in their fair share of scandals!).
To get a quick sense of the most expensive major ASX bank stock, I have used the price to book value, or P/B. It compares the price of shares to the tangible assets per share. By excluding intangible assets, such as the value of brands and other things which are not physical assets and loans, we can get a better sense of the actual value of its assets.
As you can imagine, the less you pay for the assets the better (i.e. a lower P/B = gooder).
Here's the P/B ratios of the major banks:
- Commonwealth Bank: 2.33
- National Australia Bank: 1.58
- ANZ Banking Group: 1.47
- Westpac Banking Group: 1.85
From this simple comparison, it's clear Commonwealth Bank shares are most expensive, relative to its assets. However, while ANZ Banking Group appears cheapest, it is not as clear cut because things can change quickly.
Indeed, this is a point-in-time valuation using today's share prices with the value of a bank's assets last financial year. A lot can change in a year.
For a most robust valuation, combine this P/B test with other valuation measures such as a DDM, price-earnings ratio and — this is important — a lot of boots-on-the-ground research. Go into a bank, apply online, talk to mortgage brokers and friends. Is it easier to get loans from one versus the other? What interest rates do they offer? What's the bank's strategy going forward?
Imagine a smashed mirror — it's your job to put all of the pieces together.
Buy, Hold or Sell Commbank
This a quick and easy way to value bank shares. And by this measure, Commbank is the most expensive bank share at today's prices. But as we discussed it's not the only measure of value.
In my opinion, Commbank shares are more than a little expensive. In fact, each of the banks would need to fall in price before I would begin to get excited and buy in.
