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business newsHow Low Can the Bank Stocks Go?
By
Marty Kulas Sep 14, 2011 3:50 pm
A case study of Bank of New York Mellon raises the question: Is there value there, or is it a trap?
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The banks have been beaten down since the beginning of the year, and in some cases even longer. But while valuation ratios may look extremely attractive at first glance, the menace of lawsuits, diminishing income, and bad debt still haunt financial stocks. For instance, Bank of NY Mellon (BK) has a market cap to cash ratio of just 0.2.
On the surface, that says that if you buy some equity (stock), let's say $1,000 worth, you would now own $5,000 of cash the bank holds. Now that doesn't factor in the debt to be paid off, so let's look at the bank's TEV, or Total Enterprise Value. That's when things get weirder. BK has a negative TEV since it has so much cash:
On the surface, that says that if you buy some equity (stock), let's say $1,000 worth, you would now own $5,000 of cash the bank holds. Now that doesn't factor in the debt to be paid off, so let's look at the bank's TEV, or Total Enterprise Value. That's when things get weirder. BK has a negative TEV since it has so much cash:
|
+ Market Cap
|
=
|
25,221M
|
|
+ Preferred Equity
|
=
|
0
|
|
+ Minority Interest
|
=
|
872M
|
|
+ Total Debt
|
=
|
38,461M
|
|
- Cash, Equivalents
|
=
|
127,319M
|
|
===============
|
=
|
========
|
|
Enterprise Value
|
=
|
-62,765M
|
This is equivalent to a private takeover in which the new owners receive $62 billion just to take control of the bank and any future liabilities (lawsuits, etc.). Money for nothing?
Another way too look at it is:|
+ Cash
|
127,319M
|
|
- Debt, Minority Interest
|
39,333M
|
|
==================
|
========
|
|
Equity Value
|
87,986M
|
The current equity value is only 25B, giving a potential discount to liquidation value of 62B. The only other company in the S&P500 with a negative Enterprise Value is Northern Trust (NTRS), another custodial bank.
If we check quarterly TEV, BK has been negative since their June 2008 Q2 filing:
Click to enlarge
Northern Trust’s has also taken a recent turn lower:
Click to enlarge
We can see the difference in value comparisons of some of the beaten down banks, though they are arguably in somewhat different businesses:
|
Ticker
|
Market Cap /
TEV Cash
|
Market Cap /
TEV
|
Price /
Book
|
Tier 1 Common Equity Ratio
|
|
BK
|
0.20
|
-0.40
|
0.74
|
12.60
|
|
NTRS
|
0.23
|
-0.45
|
1.22
|
12.30
|
|
BAC
|
0.19
|
0.14
|
0.35
|
8.23
|
|
GS
|
1.21
|
0.10
|
0.80
|
12.90
|
|
C
|
2.82
|
0.09
|
0.45
|
11.62
|
|
JPM
|
0.31
|
0.26
|
0.73
|
10.10
|
|
WFC
|
1.14
|
0.57
|
1.03
|
9.15
|
The question is, when will value investors begin to believe that the possible liabilities are priced in and begin to buy?
(Numbers compliments of Bloomberg Terminal, current or latest quarter.)
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Author is long BK, NTRS.
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