A New Look at Bank Valuations

In a post from March of last year, I noted that Iraqi bank stocks did not seem particularly attractive on a valuation basis. PE’s were high and growth was unspectacular.
This is no longer the case for the entire sector. While share prices have gone pretty much nowhere, 2011 was a stellar year for earnings growth at many of the banks. On a PE/growth basis, some of them are now quite cheap.
The chart shows PE/growth based on the PE’s reported in Rabee Securities’ weekly report for May 18, 2012 and 2011 net profit growth. In computing the growth rates, I have adjusted 2010 earnings upward by the 2010-2011 percentage changes in average equity.
This adjustment raises the 2010 figures to what they would have been had the banks been as well capitalized in 2010 as they were in 2011, assuming no change in return on equity. In cases where average equity grew faster than earnings, adjusted earnings growth will be negative even when the unadjusted number is positive. This was the case for BIBI, BMFI, and BUND, for example. In these cases, PE/growth is not a meaningful metric.
Also included, for the sake of comparison, are the majority shareholders of BBOB, BDSI, and BMNS—Burgan Bank (BURG), HSBC, and Qatar National Bank (QNBK), respectively. (Note that the growth rate used for the Burgan Bank calculation is based on profit before provisioning rather than net profit.)
PE/growth for all of the Iraqi banks in the chart was well below 0.50. (A value of 1.00 would make them fully valued by this criterion.) In two cases, the ratio is less than 0.15—BDSI (0.07) and BMNS (0.11). These names can’t get much cheaper than this.