Singapore Economy: Video on Analyst Updates for February 2009

SOME BANKS ARE TOO LARGE TO FAIL

But they are not immuned to nationalization. According to Philips securities,

once nationalized, common equity holders (i.e. Shareholders share price or

equity will be decimated). For those who consider buying bank shares, in

anticipation of a turn-around, they generally will be rewarded when the

market turns around. But provided that the banks are not nationalized.

Because when a bank is nationalized, it is usually at a bad state.


Example (Hypothetical): -

If a bank is currently worth $1,000 and there is 1 shareholder owning 1000

shares at $1 each.

And assume that Share price = Equity

Therefore Asset = Equity + Debt

If it has assets of $20,000 And debts or $19,000 --> Equity = $1,000.

Since the bank suddenly discovered that part of their $20,000 assets which

they thought was assets is GONE. Assume that $950 of that $20,000 is

deemed assets that is not recoverable and lost fo good.


That means that the bank's equity is now (Asset - Debt) = $19,050 - $19,000

= $50 dollars.


That means instead of a $1 stock price, the equilibrium price of the bank

stock should be only $0.05 (or 5 cents).


Consider that at this scenario, the bank is in a desparate position and goes

to the government to ask for a bail-out. The government values the bank at

$0.05 per share. Since the bank has 1000 shares outstanding, that values

the bank at $50 dollars.

Say the government then invest $950 into the bank, by issuing more shares

at $0.05 per share. That is a whopping 47,500 shares.

So instead of being a 100% ownership at 1,000 shares, the enlarged

number of shares is 48,500 shares. The common equity shareholders will

suddenly only hold 2.07% of the bank, effectively relinquishing control to the

government.


But let's say for instance, some of these asset prices such as properties, we

know that the prices won't be forever depressed. In other words, due to the

nature of the BAIL-OUT, even if in the future the $950 of losses gets

"write-back" into the books as assets or booked at Profit of $950 2 years

down the road.


The common share holder, holding only 2.06% of the bank, gets back only

$950 x 2.06% = $19.57, having already lost $950. The net loss is still a

whopping $930.43.


So even if the banks shares are CHEAP, the common equity shareholder

and/or Potential investors must BET that the bank will NOT be nationalized.

Because doing so will usually entail the government injecting capital while

valuing the bank at dirt cheap prices, effectively taking control of the banks.


Subsequent upside is mainly for the government and common share holder

will lose most of their investment.


So how to look out for which bank share to invest?

We think that investors should always look for bank shares that have little

risks of further losses and is in no danger of bankruptcy and/or being

handed a "bail-out" by the government.


Because a bail-out typically saves bank jobs, but not the share holders.


All banks are somewhat affected

As a result, many banks are in "risk aversion" mode and concentrating on

raising lending margin and only focusing on customers passing the most

stringent credit tests.

If you are in a current bank loan and your rates are rather high, call us

to evaluate Refinancing. If your house valuation is high and your debt is low,

you may want to consider refinancing plus get "CASH OUT" a term loan.

This gives you the added ammunition and ready cash to pounce on any

potential opportunities that come by given the fairly attractive stock-market

valuations now.

http://www.propertybuyer.com.sg/viewnews.php?article=72