Why have banks done well in the past year ?

Dear Fellow Investors

Why have banks done well in the past year ?

Especially our HL Bank and OCBC shares.

There are several reasons: Because of the 2008 financial crises, the investment crowd shunned banks. It is similar to a plane crash. When Air Asia suffered a plane crash investors shunned air line and travel stocks.

It was possible after the Air Asia disaster to pick up air line stocks at a big discount as well as really good deals for a travel package. Dolly and I flew to Bali on MAS for a short holiday after the Air Asia crash and the plane was empty. The hotel and streets of Bali were also empty of tourists. It was the best service we ever had on MAS !  

That fear gradually disappeared as the crash was a one off incident. The Air Asia share price recovered.

The same is true for quality banks but the fear has been greater so recovery has been slow.   

Book values are only beginning to recover and while we wait high dividends  reward us. There is scope for book values to rise.

The reason is that interest rates have been moving higher in sync with sustained world market growth.

Banks can charge more for loans with higher rates.  

In Singapore, the property market is recovering after a 5 year down turn. According to the MAS website  loan demand has been rising for the last 6 months. Singapore house buyers are paying higher mortgage costs and that benefits shareholders of the banks.  

One fear that have held back bank stocks is the fear of bad debts. This is not a worry as the bank asset to equity ratios have been gradually climbing.  For example OCBC on their last quarterly statement reported assets of SGD 454,938,000 with equity of SGD 39,008,000 for a ratio of 8.5 .  That means 8.5 times more assets compared to equity.

A low ratio is a warning but a high ratio shows financial strength.

In addition, non performing loans at OCBC based on the last quarterly report were manageable at 1.3 % . The HL Bank numbers look similar to OCBC .

The biggest equity risk as interest rates rise is for highly leveraged companies. The companies we hold for you have low or no debt with growing revenue and earnings.

With the GE  14 on May 9 the dominant  market emotions are uncertainty and hesitation. I am not worried nor should you be.

These emotions present opportunities just like airlines after a plane crash and bank stocks after a financial crises.

A great company is a great company. Great countries  like Malaysia/ Singapore are always great countries. We can always make money if we are prudent and disciplined.

Investing in financially strong  well managed companies  is always better than putting your money into bank deposits.   

Invest well and grow your wealth

Bill

Today's 'critter' is the corn crake.  It's a bird in the rail family. It breeds in Europe and Asia -- and as far east as western China, and migrates to Africa for the northern hemisphere's winter.  This secretive species breeding habitat is grassland, particularly hay fields, and it uses similar environments on the wintering grounds.