Philippe Delhaise

Philippe Delhaise is President of Hong Kong-based Capital Information Services, a consulting company specializing in financial and strategic risk management.

Books

Asia in Crisis - The Implosion of the Banking and Finance Systems , John Wiley, 1998

Valuation of Asian bank shares

1. Standard valuation theories do not apply to Asian banks.

   - with a few exceptions in Hong Kong and Singapore.

2. Do not invest in Asian banks for their book value.

   There isn't much of it! Except for banks in Hong Kong and Singapore, together with a few isolated cases in some other countries , most banks in Asia have minimal or negative equity.

3. Published accounts do not tell the truth.

   Many banks conspire with regulatory authorities to conceal their problems. This is a result of years of uncontrolled growth, culminating in the Asian crisis of 1997, but Japanese and Korean banks were already very weak early in the 1990s while Taiwanese banks started suffering only recently.

4. Banks in Asia have seldom created value for their shareholders.

   Let alone in a way commensurate with the (usually high) risk profile of the institutions. This remark does not, of course, hold true for bank founders who went public at grossly overpriced levels in the early 1990s, but that's another story.

5. Only Singapore and ( especially ) Hong Kong banks have generally combined good profits with low risk, resulting in real value creation.

   Prior to the 1997 crisis, banks in Hong Kong, the Philippines and Thailand enjoyed comfortable profits, thanks to unnaturally high interest margins. Singapore, Malaysia and the Indonesian private sector also had reasonably good profits. Most of the banks outside Hong Kong and Singapore faced disaster when their profits and equity were wiped out by delinquent loans.

6. Quite why the shares of so many listed banks in such countries are still worth anything is beyond understanding.

   It has to do with the way the market prices them: if it can hold on to its license, a bank remains a potential source of future dividends . Yet the goodwill attached to that license will depend very much on artificial measures taken by Asian governments to salvage the banks, since the present value of future cash flows seldom exceeds the current loan losses.

7. Asset management companies will transfer wealth from the many to the few: from taxpayers to bank shareholders.

   The key to strategic buying of bank shares will be to anticipate such huge wealth transfers.

www.bankatrisk.com