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31-03-2024, 11:47 PM
Hi weijian,
The above comment was given by me tongue-in-cheek. Because I couldn't understand the "excitement" by the market for a stock that just maintain their ROE numbers only.
For a bank itself, the bread and butter is their lending business. NIM and volume growth is the main driver of ROE for this business. Unfortunately, this part of the business had been squeezed by interest rate movements. Therefore, in order to drive further growth, acquisitions have to take place. There is only so much one can grow in Singapore. Better ROE business actually comes from their non-lending interest income businesses and those that are more asset light. But the main part is still the lending business. That is where most assets are allocated to for a bank business.
Why wouldn't a 0.7x BV company be re-rated upwards instead? Why wouldn't a 1-1.3x BV company be re-rated downwards instead? In a crisis, all will be re-rated downwards. It is just market perception of future earnings potential of a company you have invested in. Generally, there is not much money to be made if you agree with market valuation and definitely much to lose if you overpaid for a company, even if it is a good one.
(31-03-2024, 09:38 PM)weijian Wrote: I wouldn't be very excited if most of a "10%pa gains for next 5 years" are all FV property gains - can see, cannot touch kind.
The above comment was given by me tongue-in-cheek. Because I couldn't understand the "excitement" by the market for a stock that just maintain their ROE numbers only.
(31-03-2024, 09:38 PM)weijian Wrote: Maintaining ROE can come in different manners - (1) Better/growing business economics, (2) borrowing more, (3) returning capital. Some folks may not like all of them.
For a bank itself, the bread and butter is their lending business. NIM and volume growth is the main driver of ROE for this business. Unfortunately, this part of the business had been squeezed by interest rate movements. Therefore, in order to drive further growth, acquisitions have to take place. There is only so much one can grow in Singapore. Better ROE business actually comes from their non-lending interest income businesses and those that are more asset light. But the main part is still the lending business. That is where most assets are allocated to for a bank business.
(31-03-2024, 09:38 PM)weijian Wrote: I for one, would be looking for a quality asset trading at 1-1.3x BV, and be cautiously optimistic that its quality will allow its BV to keep compounding faster or even the possibility of having the Market to re-rate its BV multiple upwards, compared to let's say, a cheaper lower quality asset that perpetually trades at 0.7x BV and then have a real risk to be re-rated to 0.5x BV.
Why wouldn't a 0.7x BV company be re-rated upwards instead? Why wouldn't a 1-1.3x BV company be re-rated downwards instead? In a crisis, all will be re-rated downwards. It is just market perception of future earnings potential of a company you have invested in. Generally, there is not much money to be made if you agree with market valuation and definitely much to lose if you overpaid for a company, even if it is a good one.