Valuation

Here, we look at the asset’s valuation relative to its peers using classic multiples such as P/E, PEG, P/B, P/S, P/FCF and EV/EBITDA for corporates. These multiples are well-known and widely used thanks to their excellent predictive power. For the banks, we use a different set of metrics: classic P/E, PEG, and P/B multiples, as well as our know-how metrics, such as P/CR, P/RIBPT, and P/IBPT. P/CR is Price to Core Revenue (CR), similar to P/S for corporates. CR is calculated as Net interest income plus Net fee & commission income. P/IBPT is Price to Income Before Provisioning and Taxes (IBPT), similar to EV/EBITDA for corporates. IBPT is calculated as Core revenue minus Operating expenses plus Non-recurring income. IBPT measures operating profit but includes non-recurring items such as, for example, trading income, which may be heavily volatile. P/RIBPT is Price to Recurring Income Before Provisioning and Taxes (RIBPT), similar to P/FCF for corporates. RIBPT equals Core revenue minus Operating expenses. RIBPT measures the recurring operating profit of a bank, i.e. excluding inherently volatile sources of income. Also, both IBPT and RIBPT exclude provisioning, which is usually highly influenced by management decisions and rarely reflects the actual dynamics of the problem assets. We have been using these metrics for over a decade, and they have proven to have high predictive power for banks from both emerging and developed markets.

The valuation score reflects how much this asset is under- or overvalued on the applicable multiples relative to its peers, including global, regional, country, sector, industry, and size peers. The lowest score (1 out of 7) means the asset’s multiples are significantly higher than various peers (‘greatly overvalued’). The highest score (7 of 7) implies that the asset’s multiples are markedly lower than peers (‘greatly undervalued’).

For bonds, this section benchmarks the bond’s yield-to-next (YtN, combining yield-to-maturity, yield-to-call, and yield-to-put) against the YtNs of the bonds with similar overall risk profiles and denominated in the same currency. The bond with YtN materially above that of the relevant peers will receive the highest score (7 of 7) and be labelled as distinctly ‘cheap’. On the other hand, the bonds with the lowest YtN among the relevant peers will receive the lowest score (1 of 7) and be labelled as very ‘expensive’.