Recently, while out “bargain hunting”, I came across a European bank named Dexia SA.
Quantitative
Dexia has more than 500 billion of Assets under management, has a price to book ratio of less than 1, price to revenue ratio of about 1, price to tangible book of less than 1 and earned about 50cents a share amidst economic uncertainties. Apart from that, they are seriously cutting down expenses, restructuring, streamlining and focusing on core operation and disposing off “toxic” asset. Most importantly, Dexia is still generating healthy net interest revenue
It is true that Dexia was badly affected during Subprime (only for 1 financial year). But which bank didn’t? Even the mighty Citicorp was in ruin and Goldman Sachs, the world most profitable investment bank, needed a mouth to mouth resuscitation from Berkshire Hathaway, at the very least.
With that being said, the fair value of Dexia’s mortgage portfolio and loan book will recover along with the economic recovery. Impairment charges will ease, loss provision will shrink and bad debt will also contract resulting in an aggregate improvement from continuing operation. There is no doubt that earnings will improve in due course, facilitated by the unrealised gain resulting from upward revaluation of active asset within the balance sheet. The fair value of inactive assets under “run off mode” will also contribute to an increase in comprehensive income. Similarly, this is due to the upward revision of portfolio value in “run off mode”.
Qualitative
Micro qualitative
On the who’s who and what’s what, 20% of Dexia’s outstanding shares are owned by various government agencies and it has government officials within the board of directors to supervise the transformation of the entity. The recent restructuring has allowed Dexia to downsize and focus on its core operation, mainly retail banking, public financing and wealth management & insurance.
Retail & commercial banking is the engine of growth for Dexia. It will provide for a higher liquid asset under management resulting in a higher net revenue and fees income which ultimately will contribute to a more reliable and stable source of funding for the bank. Their current target market of growth is Turkey, which is a fast growing economy most overlooked by investors. There is definitely a lot of room for organic growth within the retail banking sector, beyond Belgium, Luxembourg and Turkey.
The forte of Dexia however is public funding and financing government sponsored project. Dexia is recognized for their public financing just like how Warren Buffett is synonymous to investing. They are one of the leaders of public financing in the world and their experience within this space will give them competitive advantages over other banks. On a macroeconomic level, public investments are imperative for economic growth. Hence, it is only natural that Dexia will remain relevant in that space, at least until Kingdom Come.
Lastly, its asset management operation spans across the globe and they have working alliances and partnerships with Royal Bank of Canada and other hedge funds in all continents (They even invested in Bernard Maddofffff). In that respect, they are diversified and have considerable exposure to the European, American and the fast growing Asian market.
In treasury operation, with about 1.8 billion shares outstanding, there is a very high possibility for shares buy back in the future once they exit the government funding program. Such operation has taken place in the past and the past is always a good “action indicator” of the future. With that being said, should a share buyback operation be materialised, earnings per share will increase, thereby officially making Dexia the “blood diamond in the stock market”.
Last but not least, judging from the aggressive culture of the company, I am bracing myself for an aggressive expansion in the near future once the condition of money and capital market stabilise.
Macro qualitative
On a general note, it is crucial for an economy to have a solid banking system in order to have real economic growth (as opposed to stagnant inflation). This bank is a necessity for economic growth within the European Union.
Assuming economic fundamentals improve, there is no way Dexia would go down. The politician will not allow it as the economy will not be able to withstand the cascading effect. With that being said, the probability that a house get burnt down is probably higher than the probability that Dexia will go down. Hence, please check the stove again before leaving home.
Conclusion
Does it make sense that Moody Corporation, the credit rating agency with not much tangible asset is worth more than a bank with more than 500 billion in asset?
Saving the absolute best for last. Dexia is selling for about 3Euro a share! while ANZ is trading at about 24AUD.
It has a bigger asset base than ANZ, but it is trading 7 times cheaper than ANZ. Why?
ANZ is reasonably priced at about 13 times earnings. Neither cheap nor expensive (a technology stock usually trades higher than 20times earning). Dexia is 7 times cheaper than ANZ. Why such a big price variation-discrepancy? Maybe we should consult the founder of Capital asset pricing model and modern portfolio theory.
Personally for me, this is the beauty of value investing! As Warren Buffett puts it “We want to be greedy when others are fearful and we want to be fearful when others are greedy”.
Dexia is indeed the needle in the haystack for me.
*Note – This represents only my point of view and assumption at this present point in time. I, Stanley Hanitio, the author, shall not be held liable under any circumstances for any losses of any size and condition that may occur should economic or company fundamental worsen. In short, I AM NOT GOD. I am only his humble servant.
