Patience is one of the key attributes of a successful investor. The likes of US master Warren Buffett have been known to wait years for the right company at the right price.
Now, while buying stocks at a fair price will tend to pay off over the long term, we all love to bag a real bargain.
My preferred financial metric for valuing banks is price-to-tangible net asset value (P/TNAV). If you can buy 1 of assets for less than a quid, youre on to a winner.
Of course, the value of the assets on the balance sheet must be a fair reflection of their worth and we all know that banks have been writing down the value of their assets with monotonous regularity since the 2008/9 financial crisis.
However, HSBC has recognised more losses than its rivals, and is ahead of the field on cleaning up its balance sheet. Yet on a P/TNAV basis the group ranks cheaper (1.20) than two of its Footsie peers: Standard Chartered (1.22) and Lloyds (1.46).
At what price a bargain?
In a previous article,I benchmarked Lloyds against Wells Fargo, a company in which Warren Buffett has a $24bn stake, and which he holds up as an exemplary traditional bank.
I came up with a bargain P/TNAV of 1.11 for Lloyds (a share price of just over 56p). Central to my calculations was historical return on assets (ROA). Lloyds ROA in the years before the financial crisis was 0.85%.
HSBCs ROA over the same period was 1.01%. If I adjust what I considered to be Lloyds bargain P/TNAV of 1.11 proportionally for HSBCs superior ROA, I come up with a P/TNAV for HSBC of 1.32. Dollar/sterling exchange rates impact on HSBCs TNAV (the bank reports in dollars), and I get a share price range of 689p to 723p based on the range of currency fluctuations since HSBCs last reported results (4 August).
HSBCs shares are trading at 662p at the time of writing. I therefore have the company currently in the bargain basement, and would see it as a bargain up to at least 689p.
That’s my simplistic take on HSBC. However, if you’re thinking about investing in banks, or already own shares, I would strongly urge you to expand your knowledge by reading the Motley Fool’s “Essential Guide to Investing in Banks“.
In this exclusive FREE report, our senior banking analyst explains in plain language six key ratios you should be looking at, and why they’re vitally important for investors.
The report comes with no obligation and can be in your inbox in seconds — simply click here.
G A Chester has no position in any shares mentioned. The Motley Fool UK owns shares in Standard Chartered. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.