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ING Groep N.V. Message Board

  • combohost combohost Sep 22, 2011 4:26 PM Flag

    Jpomper: A valuation question :)

    You are probably one of the fewest people on yahoo msg board that has decent thinking/analysis.

    Would you bother to share your formal quantitative valuation on this bank? (how much is it worth in value basis) I just want to see your thinking path vs. mine.


    Thanks in advance.

    You can certainly start a new topic post with your formal valuation analysis

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    • Somehow, I don't see it. You can stretch the rubber band only so far..then it will break. You can prop up socialism only so far..then someone has to pay. The entire EU has the same problem. Too many freebies.

      Seems the Brits are the smart ones here. Never joind the EU.

      I just hope the Greece problem does not seriously affect the USA in a serious way.

      Ther is no such thing as a free lunch!

    • Hi Sam,
      as you know, my opinion was and is, that most probably
      -Greece wants and will remain EU country, and stay euro-zone
      -Sooner or later it will have to do some form of bankrupcy
      -Bankruptcy will be a controlled process, managed by EU
      -Greece will get bailout, but first have accept conditions
      -First: they have to stop overspending, a 15Bil/year cut
      -Second: they have to sell state assets, and the proceeds will have to go pay down bonds
      -Third: their creditors have to take haircut, but in planned and controlled fashion
      -EU does not want greek banks to fail, since if this happens, all spent money and effort becomes a waste, and the collapse unavoidable.


      Now, this Controlled process to manage conditions is ongoing.
      I do not care what commentators say or write every day. Just follow what Merkel said.

      We are at end of first phase now.
      I think the second phase is open on the table, published yesterday, Eu plan Eureka, by RolandBerger, their think-tank.
      If this plan succeeds, then in third phase the haircut will be no bigger than the PSI already agreed on (21%)

      And in this case, one of my 3 options will work out fine.
      And NBG remain a good bank and the price recovers (goes up cca. 10 times in 4 years)

      If all efforts fail, EU breaks, and the worst case materializes: all greek bonds must take 50% haircut, then NBG chance for survival is cca. 50%. I am willing to take this risk with 2% of my portfolio.

    • Hi Sam,
      after last weekend conferencing, I try to reevaluate my position on NBG. I need my data updated, before I can complete the calculations. But here are my rough numbers.

      1) The good news
      -NBG management definitely makes me believe that they fight tooth and nail to survive. They just said failure is not an option. “Strong capital position: Group’s tier 1 ratio at 13.1% [€8.96 billion], while its core ratio is at 12.0% [€8.19 billion]. Strong liquidity."

      -Sure, Greece corporate loan defaults are up ... no surprise after 3 years of depression. But the expected defaults are covered at 55% of capital, those over 90 days past due delinquencies (NPL). This is cca. EU average coverage, but exceptionally good in Greece.

      -Finally, NBG can always sell its 95%+ stake in the hugely profitable Finansbank. It is trading at about €5.4 billion on the Turkish stock exchange. NBG has been planning to sell 25% of its stake for several months, but so far showed no sense of urgency.

      2) The bad news:

      As one might expect, NBG was a big buyer of Greek souvereign bonds. The bonds time exposure is slowly trailing off, as NBG is no longer replacing maturing bonds, but it’s still a whopping €13.7 billion GGB plus €5.7 billion of “Titlos” bonds.

      Take a look at GGBs first. While the bank already took some impairment charges on Greek bonds, its 88% average book value is very optimistic: a five-year Greek bond was trading at 55% last week. And we should assume that a 50% haircut is unavoidable.

      This means 13.7B times (0.88-0.50)=5.23B Euros outstanding LOSS for NBG as Greece defaults. This is a huge loss, against 9.0B Euros capital.


      There are 2 options:

      - They sell all Finansbank. The income is used against the losses. NBG loses its crown jewel, but the bank will survive easy, no dilution, no state ownership. In this case we still have NBG Greece and all Balkan subsid.banks. I expect in 1-3 years $2-3, and in 5 years $5-7 ADR price.
      This is the best option. NBG just needs some 2-6 months to complete.

      -They write down this 5.23B, cca. half of their capital agains the losses. In this case they have to issue new shares for cca. 4B Euros. This is a big dilution. But the bank will survive, current shareholders will need 2-4 years to get back to $2-3 ADR price.
      This is the second best option.

      3) The black swan factor is the Titlos bonds.
      Unfortunately, NBG is a counterparty in the notorious off-balancesheet swap transaction arranged by Goldman (GS) for the Greek government, in order to hide part of its debt. Goldman arranged a Special Purpose Vehicle called Titlos PLC, which issued €5 billion bonds back to NBG.

      NBG has no reserves to cover Titlos losses.
      I just dont know if GS gave guarantees or not. I dont know if Greece offered special guarantees on Titlos. I dont know Titlos will be included into Greece's debt to haircut. Or special case.

      If Titlos is an additional 2.8B (50%) loss for NBG, then the best case is that NBG must sell Finansbank plus lose (and replace) 2.8B Euro capital. This is the worst option. But even in this situation NBG can survive, if it can execute all restructurings in time.


      Well, this is my outlook. In case you have any more info, or have latest data, please share.

    • Hi combohost,
      I hope the above copies helped to get an idea, how an old "true believer in fundamentals" kind of investor, like me, works. This method assumes a 3-5 year investment horizon. Do not use fundamentals, if you have shorter timeframes.
      By the way, the funny thing is, fundamentalists are a dying breed. Especially this year, when prices move on public sentiment, negative mood, twisted interpretations of facts, etc.
      But we will come back in vogue.

      Do your own calculations, work out your very best method.
      Best regards, JP

    • It is useful to take a look at other valuation methods to confirm the primary method.

      1) The longterm Relative Average Bank PE ratio is cca. 0.82
      (in 1997=0.81, in 1998=90, in 1999=0.80, etc).

      The bank's relative PE number usually varies betweeen 0.80 and 0.90 of the Market Average P/E.

      Now, in June 2011, we had S&P500 Market Average P/E ratio at 15.6, in september we have 13.2
      The Bank's Relative (to S&P500) Average PE should be around (15.6*0.82)=12-13 or (13.2*0.82)= 11.


      Instead, we have a current 10 BIGGEST Bank PE average PE=6.0 for European banks. and P/E=7.5 for USA banks.

      This confirms the undervaluation.



      2) I like to use multiple linear regression (a math model) to calculate how the bank share price, assuming it depends on their EPS, Bookvalue, Dividend.


      In 2001, for the world banking sector, the best linear approximation equation looked like:
      SharePrice= 0.27*EPS(ttm)+2.27*Bookvalue

      For example, using the above eq. for JPM in 2001, this price estimation worked out like this:
      0.27*2.15+2.27*21.5=49.2, while JPM actual price was 48 in 2001.

      2B)Since that time, this equation changed dramatically, and in mid 2011, it looks for top banks like this:
      Shareprice=3.1*EPS+0.6*BookValue

      For example, in 2011 for JPM, the price can be estimated using this new equation as:
      3.1*4.5+0.6*43.7= 40.1

      Well, the current share price for JPM is 40.9
      so, pretty good.


      2C) This just shows, that in 10 years, the investors value perception changed a lot. The importance of the first parameter (EPS) increased from 0.27 to 3.1, which is like 11 times.
      So, today people put a much higher importance to EPS than they did 10 years ago.
      Paralel, people were ready to give money over 2 times its Bookvalue 10 years ago. Today they are much more tightfisted, and dont give more than 0.6 times BookValue.

      2D) Finally, this only shows you how much potential JPM (and ING) shares migth have in 10 years again.

      Do the math for yourself. If the perception swings back in the next 10 years to the 2001 state of mind, we might get far over $100 for JPM (and ING).

      This just confirms the "subjective valuation" extrem point in 2011.

    • It is useful to take a look at other valuation methods to confirm the primary method.

      1) The longterm Relative Average Bank PE ratio is cca. 0.82
      (in 1997=0.81, in 1998=90, in 1999=0.80, etc).

      The bank's relative PE number usually varies betweeen 0.80 and 0.90 of the Market Average P/E.

      Now, in June 2011, we had S&P500 Market Average P/E ratio at 15.6, in september we have 13.2
      The Bank's Relative (to S&P500) Average PE should be around (15.6*0.82)=12-13 or (13.2*0.82)= 11.


      Instead, we have a current 10 BIGGEST Bank PE average PE=6.0 for European banks. and P/E=7.5 for USA banks.

      This confirms the undervaluation.



      2) I like to use multiple linear regression (a math model) to calculate how the bank share price, assuming it depends on their EPS, Bookvalue, Dividend.


      In 2001, for the world banking sector, the best linear approximation equation looked like:
      SharePrice= 0.27*EPS(ttm)+2.27*Bookvalue

      For example, using the above eq. for JPM in 2001, this price estimation worked out like this:
      0.27*2.15+2.27*21.5=49.2, while JPM actual price was 48 in 2001.

      2B)Since that time, this equation changed dramatically, and in mid 2011, it looks for top banks like this:
      Shareprice=3.1*EPS+0.6*BookValue

      For example, in 2011 for JPM, the price can be estimated using this new equation as:
      3.1*4.5+0.6*43.7= 40.1

      Well, the current share price for JPM is 40.9
      so, pretty good.


      2C) This just shows, that in 10 years, the investors value perception changed a lot. The importance of the first parameter (EPS) increased from 0.27 to 3.1, which is like 11 times.
      So, today people put a much higher importance to EPS than they did 10 years ago. Paralel, people were ready to give -to own a bank share- over 2 times its Bookvalue 10 years ago, but today they are much more tightfisted and ready to give only 0.6 PB.

      2D) Finally, this only shows you how much potential JPM (and ING) shares migth have in 10 years again.

      Do the math for yourself. If the perception swings back in the next 10 years to the 2001 state of mind, we might get far over $100 for JPM (and ING).

      Do the math for ING yourself.

    • I have a very simplistic method to approximate the banks subjective valuation by investors, based on simple model calculation.

      The two biggest items on bank's Assets sheet usually are the loans and the mortgages. Assume both is 50% of the assets, no other assets.
      Then the total "demand" or "popularity" of banks, as subjective valuation, can be expressed as:

      Subjective Valuation= (Load demand+mortgage demand)*risk appetite

      Now, lets see how those items are valued by the investor public opinion now.
      Loan demand: We are in deflationary times. Everybody tries to pay back loans, including private persons, corporations, countries. The demand for new loans is extremly low.
      A good measure is Interest Rate, which is at the low end, since years.

      Mortgage demand: Housing prices fall. Mortgage collateral value falling, lower than calculated at loan origination. No new building permits demand, high "ForSale" house inventory. Mortgage demand is extremly low.

      Risk appetite: Everybody runs from risk. Only the safest instruments are in demand. A good measure is the inverse of GoldPrice, which is at alltime high, so risk appetite is extremly low.


      Summary: All 3 items are at secular extrem low. "Subjective valuation" of banks by investors are at century low.

      Right now, I think banks are the most disfavored asset class, at least since the Great Depression.


      Certainly there are other factors explaining why banks are disfavored now. But this simple model gives a good guide how the evaluate the public mood "for or against" banks.

    • Let's see how Graham's Number is relevant,
      how to use to predict ING's share price?

      An 8 year application of Graham's formula on ING from 2003 to2010: All price in Euros.
      Years 2010 2009 2008 2007 2006 2005 2004 2003
      Net earnings -0.73 -0.57 -0.27 3.31 3.57 3.32 2.80 2.00
      BookValue 10.99 8.95 8.55 17.73 17.78 17.7 13.46 10.95

      GN in Euro *10.99 *8.95 *8.55 36.3 33.1 36.4 29.1 22.2XchgRate 1.35 1.42 1.40 1.45 1.30 1.28 1.1 0.95
      $GN as prediction 14.8 12.7 11.9 52 44 46.5 32.0 21.1
      Actual price, $ 9.6 11.2 11.1 37 40 34.8 29.5 23.5
      Discount -35%(1) -12% -7% -29%(2) -9% -25%(3) -8% +11%

      After carefully examining the results, I found the GN is a good predictor of the actual ING share Price, using the last 8 years data.

      The best prediction method is simply as follows:
      -Calculate the Graham’s Number with actual BookValue and earnings for ING,
      -and discount it by 10%.

      using this method, actually you could expect to hit the next year price within cca. 10% range in the last 8 years.

      3)If the above is correct, let's apply the formula for the future. What share price can we expect at the current data?

      Currently GN=SQR(22.5*1.34*14.5)=$21 -10%= $19

      Summary: ING should be valued $19 currently,
      ING is extremly undervalued now, (just like other banks are) compared to its historical average valuation metrics.
      At the current $6.5/share, ING is valued at 31%, to its own average valuation.

    • Hi combohost,

      I copy for you some pages from my ING dossier. This is just for samples. Never trust anybody except your analysis.

      1.Graham's Number (GN) on ING, and other banks
      Benjamin Graham, the man who developed this equation, was a former mentor of Warren Buffett and is the so-called Godfather of value investing. The Graham Number (GN), or the maximum price an investor should pay for a stock, is derived using only two data points:
      -current earnings per share and
      -current book value per share.
      You buy as long as price is below GN, and sell on weakness above it.
      Graham Number = Fair Value of a Stock = Square Root of (22.5) x (Earnings per Share) x (Book Value per Share).
      The math of the Graham number is relatively straightforward. It is predicated on the belief that the price-to-earnings (P/EPS) ratio should be no more than 15, and the price-to-book value (P/BVPS) ratio should be no more than 1.5.
      From that, the product of the two should not be more than 22.5. In other words, (P/EPS of 15) x (P/BVPS of 1.5) = 22.5, from which the equation was created.


      Lets check ING, and 4 other banks to take a first look at the method. I use yahoo data here.

      ING GN=SQR(22.5*$1.34*14.5)=$21, current price $6.5, at 31% of GN.

      CITI GN=SQR(22.5*3.24*60)=$65, current $25, at 38% of GN.

      JPM GN=SQR(22.5*4.68*45)=$68 current $30, at 44% of GN.

      UBS SQR(22.5*14*1.76)=$23 current $11.5, at 50% of GN


      Clearly, all banks are undervalued, ING the most, UBS the least.

    • If you want to know about the 'value' of ING you should deep into their non-bond related exposure to Spain and know something about residential mortgage-backed securities (RMBS).

 
ING
14.10+0.38(+2.77%)Oct 21 4:01 PMEDT

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