The Malta
For children, Santa will
come tomorrow night, down the chimney, on a flying sledge or by whatever means
children’s fancy will allow, provided that he trades milk and biscuits for a
sack full of gifts.
*share price as a multiple
of historical earnings per share
Over the last two years, the share price of HSBC has increased by 199 per cent, BOV by 168 per cent and Lombard by 96 per cent. This is apart from substantial dividend income pocketed by shareholders. It could give an indication as to why, in spite of poor economic performance at production level, the feel good factor is better than it ought to be. This asset price explosion in popular equities, added to another sizeable price explosion in real estate values, is making people feel richer not from their toils but from their unearned riches through their investments.
It is not the scope of this column to express firm opinions about proper or improper valuations on the equity market. But there are two aspects which emerge from these figures which deserve highlighting.
Firstly, local bank share prices are trading at very stretched multiples of price earnings in comparison with share prices of top class international banks. Compare HSBC Malta price earnings of 24 and Bank of Valletta price earnings of 23 to the following records of a selected range of prime international banks. (Table 2)
Table 2
For the non-technical, this means that while European banks are trading on share prices that are on average 11.44 their estimate 2005 earnings per share, Malta’s two main banks are trading at multiples twice as big, suggesting that the share price of local banks could be twice as aggressive as those of most European banks.
It should be made clear that the price earnings ratio is not the sole criterion on which equity valuation ought to be judged. Equally important is the growth trend and the robustness of such earnings. Indeed one could possibly accept a more aggressive valuation for local bank equities on the basis that the profit growth in 2005 was superior to their peers inEurope .
But looking forward, one ought to question whether it is realistic to discount in equity values even more aggressive profitability growth when banks stand to lose a major source of exchange earnings onceMalta Malta
The other point which deserves comment is the fact that since September 2005 the equity price of Bank of Valletta has travelled twice as fast as HSBC Malta and six times as fast asLombard .
My concern is that a good portion of this out-performance is based on wrong perceptions of what really is involved in the bonus one for one share issue announced by the bank and due to take effect on 18 January. My feeling, from direct interviews with local retail investors, is that many are perceiving this as a Santa in January, a sort of buy one get one free tal-lira offer.
I think it is the duty of all who have the orderly performance of the financial markets at heart to explain to the public in general that what will happen is that the value of the Bank on 18 January will be spread on twice as many shares in issue the day before. As the underlying global value of the bank will not change, all things being equal, which is rarely the case, the price of Bank of Valletta shares upon issue of the bonus shares should be half that of the day before prior to the bonus issue.
While the reference to bonus issue is technically correct, I am afraid that its use in unsophisticated financial markets without proper and repeated explanations could lead to investors taking decisions on false assumptions.
Investors should keep Santa out of their investment decisions and reserve him for tomorrow night where he belongs in our children’s world.
This is normal. What
is not normal is that many who are well past the age of expecting goodies from
Santa are apparently expecting him to revisit in January with a sack full of
cash.
Investors in local equities, especially those holding share positions in the three quoted banks, seem to believe in Father Christmas even out of season. Just have a look at Table 1 to get a glimpse why I am saying this.
Investors in local equities, especially those holding share positions in the three quoted banks, seem to believe in Father Christmas even out of season. Just have a look at Table 1 to get a glimpse why I am saying this.
|
|
Table 1
|
|
Bank of
|
HSBC Bank
|
Lombard Bank
|
|
|
|
|
|
|
Share Price 20.12.05
|
Lm
7.35
|
Lm
7.33
|
Lm7.25
|
|
Share Price 30.09.05
|
5.50
|
6.22
|
6.85
|
|
Share Price 30.06.05
|
4.99
|
5.00
|
5.60
|
|
Share Price 31.12.04
|
4.49
|
4.00
|
4.25
|
|
Share Price 31.12.03
|
2.74
|
2.45
|
3.70
|
|
|
|
|
|
|
Increase since 30.09.05
|
34%
|
18%
|
6%
|
|
Increase since 30.06.05
|
47%
|
47%
|
29%
|
|
Increase since 31.12.04
|
64%
|
83%
|
71%
|
|
Increase since 31.12.03
|
168%
|
199%
|
96%
|
|
|
|
|
|
|
Price/earnings ratios*
|
|
|
|
|
20.12.2005
|
22.83
|
24.15
|
19.08
|
|
31.12.2004
|
21.28
|
17.37
|
15.29
|
|
31.12.2003
|
13.10
|
12.99
|
16.02
|
Over the last two years, the share price of HSBC has increased by 199 per cent, BOV by 168 per cent and Lombard by 96 per cent. This is apart from substantial dividend income pocketed by shareholders. It could give an indication as to why, in spite of poor economic performance at production level, the feel good factor is better than it ought to be. This asset price explosion in popular equities, added to another sizeable price explosion in real estate values, is making people feel richer not from their toils but from their unearned riches through their investments.
It is not the scope of this column to express firm opinions about proper or improper valuations on the equity market. But there are two aspects which emerge from these figures which deserve highlighting.
Firstly, local bank share prices are trading at very stretched multiples of price earnings in comparison with share prices of top class international banks. Compare HSBC Malta price earnings of 24 and Bank of Valletta price earnings of 23 to the following records of a selected range of prime international banks. (Table 2)
|
|
Price/Earnings
|
Price/Earnings
|
|
|
2005
|
2006
|
|
|
|
|
|
Halifax Bank of
|
10.6
|
9.8
|
|
Barclays
|
11.2
|
10.0
|
|
ING
|
8.7
|
9.6
|
|
HSBC (parent)
|
13.0
|
11.1
|
|
Societe Generale
|
10.4
|
10.2
|
|
AIB
|
12.6
|
11.2
|
|
Fortis
|
9.1
|
10.2
|
|
Intesa
|
13.5
|
11.5
|
|
Bank of
|
11.7
|
10.6
|
|
BBVA
|
13.6
|
11.7
|
|
|
|
|
|
Average
|
11.44
|
10.59
|
Source: own
research
For the non-technical, this means that while European banks are trading on share prices that are on average 11.44 their estimate 2005 earnings per share, Malta’s two main banks are trading at multiples twice as big, suggesting that the share price of local banks could be twice as aggressive as those of most European banks.
It should be made clear that the price earnings ratio is not the sole criterion on which equity valuation ought to be judged. Equally important is the growth trend and the robustness of such earnings. Indeed one could possibly accept a more aggressive valuation for local bank equities on the basis that the profit growth in 2005 was superior to their peers in
But looking forward, one ought to question whether it is realistic to discount in equity values even more aggressive profitability growth when banks stand to lose a major source of exchange earnings once
The other point which deserves comment is the fact that since September 2005 the equity price of Bank of Valletta has travelled twice as fast as HSBC Malta and six times as fast as
My concern is that a good portion of this out-performance is based on wrong perceptions of what really is involved in the bonus one for one share issue announced by the bank and due to take effect on 18 January. My feeling, from direct interviews with local retail investors, is that many are perceiving this as a Santa in January, a sort of buy one get one free tal-lira offer.
I think it is the duty of all who have the orderly performance of the financial markets at heart to explain to the public in general that what will happen is that the value of the Bank on 18 January will be spread on twice as many shares in issue the day before. As the underlying global value of the bank will not change, all things being equal, which is rarely the case, the price of Bank of Valletta shares upon issue of the bonus shares should be half that of the day before prior to the bonus issue.
While the reference to bonus issue is technically correct, I am afraid that its use in unsophisticated financial markets without proper and repeated explanations could lead to investors taking decisions on false assumptions.
Investors should keep Santa out of their investment decisions and reserve him for tomorrow night where he belongs in our children’s world.
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