For the purposes of teaching myself a little about fundamental analysis I am looking into the big four banks. Since it is a learning exercise, where possible I am setting up a spreadsheet with my own formulas.

I would be very interested to hear opinions on the various metrics and how much weighting in general you would put into them. Does this vary by sector? If I have made a basic mistake in my interpretation of the terms or formulas please do point it out.

All data unless otherwise stated is sourced from the e-trade website.

Price To Book Ratio (P/B)

Formula: Current share price / Book Value

Data source: Balance Sheet -> Per Share Statistics -> Book Value

ANZ: 16.41/12.55 = 1.31

CBA: 36.99/19.44 = 1.90

NAB: 21.7/18.16 = 1.19

WBC: 19.35/9.42 = 2.05

This metric in isolation suggests that based on the value of the assets owned by each company, NAB is the best value, followed by ANZ. I think this metric is not overly useful on its own, but may help form part of the bigger picture?

Price To Earnings Ratio (P/E)

Formula: Current share price / Earnings Per Share (EPS)

Data source: Profile -> Earnings and Dividends Forecast -> EPS

Current

ANZ: 11.10

CBA: 10.74

NAB: 8.32

WBC: 9.84

2009 Forecast

ANZ: 12.51

CBA: 12.70

NAB: 10.64

WBC: 12.32

2010 Forecast

ANZ: 12.25

CBA: 12.35

NAB: 12.06

WBC: 12.15

With this measure, once again NAB is coming up as being the best value of the big four banks.

As I understand it, there are problems with the calculation of EPS since creative accountants can manipulate the reported earnings (profit). Furthermore there are different ways you can calculate EPS. I think as long as the same method has been used and you approach comparing apples with apples then it still has some value?

The fact that the forecast P/E ratios converge in 2010 suggests to me that whoever calculated the forecast numbers has very little idea about what may actually happen, which is unsurprising - if anyone actually did have a good idea, why share it? I am curious to hear if people feel looking at forecast earnings and thus a forecast P/E has any value as well.

I still need to go and look at the historical P/E numbers to try and work out where I feel the ratio falls if a banks earnings are "correctly valued". Is there a generally accepted ratio or is it always relative?

Price / Cash EPS

Formula: Current share price / Cashflow Per Share

Data source: Balance Sheet -> Per Share Statistics -> Cash Flow

ANZ, CBA and WBC all currently have negative cash flow so the results for them is somewhat meaningless. NAB has positive cash flow but nothing to compare the result against in this exercise.

Excuse my financial illiteracy here, but how can the banks with negative cash flow all be reporting a profit at the same time?

The reason I looked at Cash EPS is because I have heard it described as a "purer" number than other EPS calculations since earnings can be manipulated in reports more easily than cash flow.

Regardless, once again NAB seems to be coming out on top here.

Yield

Formula: Dividend Per Share (DPS) / Share Price

Data source: Profile -> Earnings and Dividends Forecast -> DPS

Usually the after tax dividend is more interesting here, however since we are comparing companies that are currently yielding fully franked dividends, I wont go there.

Current

ANZ: 8.29%

CBA: 7.19%

NAB: 8.94%

WBC: 7.34%

2009

ANZ: 6.12%

CBA: 6.16%

NAB: 6.73%

WBC: 5.87%

2010

ANZ: 6.12%

CBA: 6.16%

NAB: 6.73%

WBC: 5.94%

Once again NAB comes out in front and once again I am unsure if looking at the forecast dividends for the next two years has any comparative value?

Return On Equity (ROE)

Formula: Profit / Shareholders Equity

I didn't crunch the numbers here but simply read the values from e-trade.

ANZ: 11.60%

CBA: 18.30%

NAB: 13.90%

WBC: 21.30%

This is where WBC and CBA look a lot better, generating far more profit with your investment dollars. I am unsure what weighting to put into this measure.

Shareholder Rate of Return (Avg Annual Rate)

I take it this measure looks at capital gains/losses and dividends as a percentage of the investment over a given period.

1 Year Average

ANZ: -5.90%

CBA: -2.30%

NAB: -10.30%

WBC: 3.00%

3 Year Average

ANZ: -15.70%

CBA: -0.70%

NAB: -9.30%

WBC: -0.70%

5 Year Average

ANZ: 3.20%

CBA: 8.20%

NAB: -0.50%

WBC: 7.30%

Now it is not hard to see why NAB appears to be undervalued relative to the other banks, investors have lost out over the last 5 years. ANZ investors probably lost a bit after inflation, CBA and WBC investors turned a profit.

Conclusions

NAB appears to be the most undervalued and thus will have a greater upside risk, likewise a greater downside risk if recent history is anything to go by.

CBA appears to be solid as a rock, WBC quite similar assuming they can make the St George acquisition work.

ANZ appear to be overvalued at the current price compared with the other banks.

I have attached my dodgy spreadsheet for anyone that is interested. Which other metrics do you find useful?

## Bookmarks