Fliujniligui's Blog : Ah cool, I remember how to post blog and can now update my strategy.

A lot of water ran under the bridge since my last post. Water runs and now it seems credit does so again. This seems to be visible on many of my bank picks. Picking banks is not the easiest thing to do, especially last March, but with good fundamental analysis and attention paid to past manager actions while times were good, fat and easy.

There are still a lot of exploitable aberrations in the market. We had a lot of media action about investment banks recently and filtering noise out of this along with update of fundamental analysis helps target long term holds out of the crowd.

There is one bank I will tell some attributes about and name later in the text. The goal is to see what is the general impression before knowing the "intangible" factor which is the company name:

Tier 1 ratio 11% raised with ongoing earning accretion and no right issue
No involvement of government directly in capital injections and/or nationalization moves
Global presence
Market cap = 0.9x shareholders' equity
CEO has been reappointed for 3 next years following appraisal of the leadership at this bank.

This banks behave as a looser in the market, but the things seems to bode very well for long term and the market cap is very low for such a bank. Also, the great focus on climatic changes, energy efficiency and stuff like that is not only helping with reputation, but it is just creating and developing a business franchise in this specialized growth market we could call "rush for sustainability". I am talking about Deutsche Bank.

Another thing everyone knows is that Canadian Banks are unkillable and they offer a nice hedge for Americans, because fundamentals behind CAD protect the value of future earnings and dividends received from Canadian Banks. The problem is everyone knows this and valuations on Canadian Banks are not far from what they were before the crisis. The thing to do is that you must define what is nice in Canada for banking and then find the same recipe in another relatively stable country. And I found it, one of it at least.

NBG has a Tangible Common Equity / Risk Weighted Assets that rivalizes with Canadian peers
NBG is loaded with Greek government bonds which yield a lot more than Canadian bonds and Greece won't default *(here could be a risk I am willing to take)
NBG has a net interest margin of 4% while Canadian banks are more near 2% (Bonus NBG is fattier than Canadian Banks on this)
It expands in high growth markets such as Turkey and some other stuff in Eastern Europe (Bonus, Canadian banks are not doing it as much)
Main activities at NBG are retail banking and lending to businesses and credit standards have always been tight.
And now Valuation : when I spotted NBG it was at 3.5$, market cap was then equal to shareholders' equity. Now, NBG market cap is equal to 1.5 equity, which is reasonable. TD bank in Canada has similar valuation, but a big fat load of intangibles and goodwill. The credit quality and capitalization are (and more now that rights issue is done) on par with Canadian banks, but growth potential is more massive, opportunities in home market are greater in Europe than Canada because there is much more blood in Europe's streets than Canada's one. Valuation is similar, but NBG may be a bit less valued since it has less intangible assets and Goodwill.

A last thing which is loaded with mistery, uncertainty, speculation but oh so funny and good impression of understanding at least all of what can be understood : the crazy Irish banks AIB and IRE. The devil in the wardrobe is the NAMA which will buy troubled loans from banks at a discount reflecting something somewhere between market price of the assets vs collateralization and performing status of loans VS long term economic value of this. The potential haircut on loans could kill the capital base of the banks and lead to more important government stake in those banks. Problem is NAMA haircut is still unknown. After reading all I could on both banks, I think IRE is less stressful since its stressed development and landbank portfolio is smaller than AIB's one, so on similar haircut at both banks, IRE will see its capital less impacted.

However AIB has a kicker asset base that can compensate for the increased risk potential from the toxic loans. AIB owns 24% of MTB and 70% of Bank Zachodni. The assets and capital of these banks are included in AIB balance sheet so selling those stakes would not raise as much Core Equity Tier 1 capital than what someone could guess by calculating market cap of both companies and then assess stake values. Those assets, however, contribute massively to AIB ongoing earning power and AIB cost management and performance before provision losses are very impressive in the middle of this mess. I calculated that 16 AIB shares virtually give 1 MTB share exposure by the stake. This being said, should NAMA do a headcut at AIB and government ends with a 65% stake, then this would mean that the remaining 35% would be valued at 2.7 billion$ based on current market cap. Owning 35% of 24% MTB + 35% of 70% BZWBK + 35% of remaining AIB group seems to be a great bargain at 2.7 billions $

The last thing I found is that small companies are sometimes debtless, very specialized and very loaded with potential. Another thing they have : they are very often viewed as high risk, very often not covered by analysts and virtually always disregarded by advisors and institutional managers. Also, some trade at a net cash (Cash - debt) exceeding market capitalization. An example of this is XSEL. Other small companies I hoard are NEMFF, CDII, BEST (Shiner International).

Unibail-Rodamco and Real Estate Closed End funds. Unibail-Rodamco is something I fetched on Paris Stock Exchange. The thing has a LTV ratio of 33% after (Irrelevant but unavoidable) revaluation on the downside of the assets. The market cap was 9.5 billions Euros at the time I bought and the net asset value of the company were about 15 billions Euros. Also, rental income which give cash flow and by which dividends are given, rose 7% HOH H12009/H12008. This is a buy wait and do not even need to hope. DRP is the real estate fund by which I became aware of Unibail-Rodamco. I like this fund because there is a low fee, discount to net asset value about 20-25% (means that for 1$ invested in this fund you get as much dividends than if you invested 1.25$ directly buying fund's holdings on the market).

This is it for today. The text long, the results are fat and the job is ongoing.

Have nice automn and be careful on the roads. Risk is not always taken care of when and where it should be the most!