Warning: this post contains a bubble chart.
Citi’s European banks research team has come up with a fresh take on earnings and valuation bubbles across major markets.
Analysts led by Ronit Ghose compared the market value of banks to the size of the economies in which they are based – a measure dubbed ”penetration”.
Methodological comment:
our calculation of bank system market value is based on the value of the quoted banks we cover, adjusted for their international businesses, and then grossed up based on these quoted banks’ share of national system loans and deposits.
For most markets, our analysis is based on an initial sample of over half the system. For Mexico and the UK, our analysis is based on only one quoted domestic bank (Banorte and Lloyds). For the US, to commercial banks we add investment banks, credit card and mutual fund companies.
From the note (click to enlarge the chart):
the most penetrated major market is China (c30% of GDP) and the least is Mexico (c8%). The old Commonwealth countries of Australia, Canada and South Africa — along with Brazil — follow
closely behind China, while Italy, Korea and Japan occupy the lower reaches of Figure 2. India and Turkey are mid-table.
And there’s more:
China has high penetration (bank market cap as % GDP) due to a high level of bank profits to GDP. But the PE multiple placed on its earnings is middle of the pack. So China has a high market value bank sector but does not have high valuation multiples relative to peers. The same — large relative market value, median PEs — is true of Brazil and South Africa.
Other high earning bank sectors can be found at opposite ends of the PE range, with Turkey (lowest 2011 PE of our sample) and Australia (one of the higher PE multiples in our sample). Turkey has one of the highest levels of
bank earnings relative to GDP, in line with Brazil. Australia’s bank sector earnings is the highest of the wealthy countries in our sample.
The note is worth reading in full (so many charts…), but for those of you with short attention spans, here’s the TL:DR summary:
whilst Australia – with a bank market value to GDP at a close 2nd only to China’s and banks earnings to GDP similar to Brazil – looks like a shining example of how to do banking and get a high multiple…turning Aussie won’t be easy: market structure, a robust economy and supportive shareholders all help explain Australia’s high earnings and valuation multiple…and while other developed markets like the UK could look to replicate the advantages of Australia’s oligopoly banking market, Australia’s commodity-driven strong economies may be harder to replicate…ditto for the investor base.
1. Investors looking for low-PE banking systems should focus on Turkey, Korea, and possibly Russia.
2. For low earnings relative to peers, Mexico screens best, as does India relative to other BRICs.
3. China and Brazil have large market values but the main risk is one of earnings sustainability not a valuation bubble.
4. For European banks the main investment take away is sticking with Standard Chartered and BBVA
Related links:
The terrorist model for banks – FT Alphaville
Bank picture du jour – redux – FT Alphaville
That JP Morgan picture – official redux – FT Alphaville
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