Yet Another Top Analyst Calls a Bubble

Nouriel Roubini and SocGen are bearish on the stock markets. Now, another top analyst, Meredith Whitney, famous for her right call on the collapse of Citigroup and other banks, now says that the market rally is not backed by fundamentals.

Bank analyst Whitney bearish on U.S. market
Mon Nov 16, 2009 3:47pm EST

NEW YORK, Nov 16 (Reuters) - Bank analyst Meredith Whitney said on Monday she does not believe the U.S. equities rally is based on fundamentals, and she is as bearish as she has been this year in the stock market.

In an interview with CNBC television, Whitney said there is "no way" the banking sector is well capitalized and it is time to reduce weighting in large-cap banks.

Whitney also said she sees a double-dip U.S. recession.

The main U.S. stock indexes pared some of their gains during the interview.

Whitney wrote a particularly pessimistic, but accurate, report on Citigroup, on Oct. 31, 2007, which got her attention from many Wall Street analysts and the news media. She has since followed this report with similar reports and predictions, which have tended to leave the companies involved with lower stock prices as the market has taken her opinion seriously. One of her claims is that goodwill is built-in to a lot of companies' share prices, and that as the market moves into dark times, this goodwill will dissipate.

In 2007, Whitney was listed as the second best stock picker in the capital markets industry on Forbes.com's list of "The Best Analysts: Stock Pickers", as well as being named "one of NY Post's 50 Most Powerful Women in NYC.

Whitney's extremely bearish view on banks landed her on the cover of the August 18, 2008 issue of Fortune Magazine. Even before the problems in September that befell Merrill Lynch and Lehman Brothers, she is quoted as saying, "It feels like I'm at the epicenter of the biggest financial crisis in history, however even a broken clock is right twice a day" In October 2008 Whitney, was ranked as one of Fortune 500’s “50 Most Powerful Women in Business.” In 2008 she won CNBC's "Power Player of the Year" over Jamie Dimon, Ben Bernanke, and Hank Paulson.

Lee Kuan Yew vs. Warren Buffett - Round 2

Some time last week, Lee Kuan Yew made a few comments about GIC's investments in the big banks, and also about Warren Buffett. He said in a Bloomberg interview:

Singapore's GIC May Seek More Bank Assets, Lee Says
By Haslinda Amin and Linus Chua

April 30 (Bloomberg) -- Government of Singapore Investment Corp. may add more bank assets to its $18 billion of investments in UBS AG and Citigroup Inc. as it chases stable returns over periods as long as 30 years, Minister Mentor Lee Kuan Yew said.

The Singapore sovereign wealth fund, which manages more than $100 billion, bought stakes in the two banks as they sought to repair balance sheets after writedowns linked to U.S. subprime mortgages. GIC, as the fund is known, may hold the stakes for two to three decades, said Lee, who's GIC's chairman.

``If there are other banks of the quality of the two that we bought into, with the promise and the capabilities and inherent capabilities to recover, we have got the liquidity to meet it, to make such an investment,'' Lee, 84, said in a Bloomberg Television interview late yesterday. ``We will not rule it out.''

This week, Warren Buffett, the wealthiest man in the world, gets his chance to give his take on the credit crunch and the banking sector:

Buffett says U.S. in recession; banks to face pain
Sun May 4, 2008 7:51pm EDT

OMAHA, Nebraska (Reuters) - Warren Buffett on Sunday said he does not expect financial markets to panic as write-downs and losses for bad debts mount in the financial services industry, but said those losses were not over "by a long shot."

The world's richest person, who runs Berkshire Hathaway Inc, said at a press conference the Federal Reserve brought markets back from a precipice in March in helping broker JPMorgan Chase & Co's purchase of Bear Stearns Cos, which was on the brink of bankruptcy.

"There's going to be more pain, sure," Buffett said. "The action of the Fed, in terms of Bear Stearns, prevented in my opinion the contagion where you're essentially going to have bank runs on the investment banks ... The idea of a financial panic ... has been pretty well taken care of. That was a watershed event."

He added, though: "That doesn't mean the losses are over by a long shot ... We've looked at some of the investment banks, and it's clear some more losses are going to be incurred."

Is Lee Kuan Yew listening?

He showed he clearly didn't listen to Jim Rogers by making comments about GIC possibly buying into more banks. And he most probably isn't listening to Warren Buffett either. Hell, Lee doesn't even really understand Warren Buffett's investment philosophy.

Buffett was speaking at his annual shareholder meeting, and had more to add:

In a question-and-answer session at the shareholder meeting, Buffett said that from a risk perspective, some banks got ``too big to manage.''

Sound familiar? What's the biggest bank in the world? I think it's one of the banks that Lee Kuan Yew's GIC invested in: Citigroup! which according to LKY, has

"an enormous spread worldwide as a retail bank".

Well, now we really know what an "enormous spread" is - it's a liability.

To finish off, be sure that it's not just about words, but it's also about making prudent investment decisions. Warren Buffett, like LKY & GIC, had the chance to pick up a stake in the banks. But Mr Buffett chose differently:

And Mr Buffett said banks need better risk management. He said he recently considered the prospects of a large investment bank, which he did not identify, by reading its 270-page annual report. He said he highlighted 25 pages where he did not understand what he had read.

'I decided not to pick that one,' Mr Buffett added.

Lee Kuan Yew and GIC, however, decided to plonk billions into Citigroup and UBS, now two of the greatest loss making banks since the credit crunch began.

Who do you think made the correct decision? Mr. Buffett or Mr. Lee?

I seriously think there's no debate!

----------------
[Update - A reader has kindly informed:
"LKY is a senior advisor to Citigroup which means that he get millions off from Citigroup from deal, salary and payment every month, every year.
http://www.citigroup.com/citigroup/press/2006/060905c.htm
Please add this important disclosure as it might shred light why LKY is so eager to invest in frailing banks."]

------
Related Posts:
Lee Kuan Yew Ain't No Warren Buffett
GIC, UBS & Jim Rogers

DBS, UOB & OCBC: A Comparative Snapshot

This research note is a brief comparative snapshot of the 1H07 performances of the three bank majors listed on the SGX.

Overview

As we can see in the table of comparative financials above, DBS is the largest of the three banks, with the greatest interest income, total income, and total assets of the three banks. OCBC, despite being a smaller bank, has a significant life insurance business in the form of its 87% stake in Great Eastern, and this boosts its non-interest income to comparable levels of both UOB and DBS. UOB is somewhere in the middle in terms of size between OCBC and DBS.

An interesting point of note is that while DBS and UOB both take charges profit while adjusting for allowances, OCBC actually takes an addition to profit from its allowances. This was a point of heated argument between Morgan Stanley Banking analyst Matthew Wilson (who like me is a Uni Melbourne graduate) and the CEO of OCBC, David Conner, during the latest results press conference.

Comparative Ratios

The table above lists some key performance ratios of the three firms, as well as the average of the three, as a comparative benchmark.

In terms of revenue mix OCBC clearly has the highest proportion of income coming from non-interest income. This can be attributed to the operations of Great Eastern which forms a significant portion of its balance sheet and income statement.

On the commercial banking side, we see that DBS is able to squeeze more out of its assets than the other two banks, and this manifests itself in the highest net interest margin of the three. DBS also has the lowest NPL ratio of the three banks.

OCBC has the lowest cost/income ratio of the three banks and DBS has the highest.

In terms of ROA and asset turnover, it would appear that UOB has the strongest position. UOB also has strong capital adequacy ratios. However its ROE is the lowest of the three.

Relative Valuation

Given that there is not much space left in Singapore to expand operations for the banks, the primary space for growth lies overseas, in the greater China region and the South East Asian region. Furthermore, there is intense competition in Singapore, with Citibank Sg recently mounting an aggressive campaign to grow its consumer business in Singapore. In greater China it would appear that all three banks have opened up operations, with DBS and UOB seeming to be the most aggressive in wanting to expand there.

In terms of non-interest income, DBS seems to be the most aggressive, and it has hired experienced investment bankers and appears to be trying to remodel the bank into a full-fledged universal bank. It will take some time for DBS to build up its capital markets network and capabilities.

Valuation wise there is not much to choose between the three. DBS and UOB are very similarly priced in terms of P/E and P/B. OCBC is priced slightly differently and this is probably due to its insurance assets.

An investment in the banks at current prices will therefore have to depend on the investors’ view of the recent turmoil in the credit markets and the broader economy, and the impact this will have on the banks going forward.

Bankers' Bonuses and Jobs at Risk

The recent subprime debacle and credit squeeze have put the pressure on bankers' salaries and jobs. The freezing up of the collateralised mortgage/debt market and other credit derivatives mean that investment bankers wielding their financial weapons of mass destruction will find much fewer opportunities to ply their trade as asset managers and other investors stay away from credit derivatives, structured finance vehicles, and related financial instruments.

A couple of articles talk more about the impact:

This article talks about a Top Barclays Banker losing his job.

This article talks about bankers being able to expect a much smaller bonus this year, if indeed they manage to keep their jobs.

I wonder what will the impact of the recent financial turmoil on this banker.

DBS ends talks to buy S Korea's KEB

News just out - DBS has decided not to buy S Korea's KEB.

SINGAPORE - Singapore's DBS Group Holdings, Southeast Asia's largest bank, said on Monday that it has ended talks with Lone Star about buying a stake in South Korean lender Korea Exchange Bank (KEB) .

The statement came after Korea's Yonhap news agency on Sunday quoted Lone Star chairman John Grayken as saying that the US investment firm had stopped talks with DBS.

Mr Grayken didn't say why the talks ended, but said that the Dallas-based fund would keep looking for a buyer for KEB, despite a legal battle over the 2003 purchase of the bank.

'We notified Lone Star that we would not be going forward due to the uncertainties in the market surrounding the local issues that have been going on for over a year,' DBS said in a statement. -- REUTERS

Acquisitions are a major source of growth in the banking industry. However, it is not exactly clear why DBS should be seeking an acquisition in South Korea. South Korea is a well developed economy with a highly developed banking market so the growth and revenue enhancement opportunities of entering the South Korean market via an acquisition are not clear. Furthermore, it is not immediately clear where the synergies are between the South Korean banking market and DBS' main operations in Southeast Asia and its fledgling operations in China, which just opened earlier this year.

In order to justify the acquisition, there would need to be significant value-enhancing opportunities that the KEB acquisition would bring to DBS' international banking services, such as investment banking or trade finance. But given that there is rather small amount of international trade between Singapore and South Korea and the main opportunity in this deal for international finance is between China and South Korea, DBS should focus much more on its organic growth in the mainland rather than seeking an acquisition in a market that is non-core to its operations. Southeast Asian companies are unlikely to list on the South Korean stock market, and similarly South Korean companies are unlikely to list their shares on the SGX. M&A activity between the two regions is also unlikely.

Furthermore, given the Singaporean origins of DBS and its predominantly Chinese culture, there would probably be several integration issues when it comes to merging the corporate cultures of KEB and DBS, the least of which being the different languages being used.

All in all this is probably good news for DBS shareholders that Jackson Tai has pulled away from the deal as any prospective deal would likely be risky and involve the winner's curse - destruction of shareholder value.