Valuing Banks using PTPP (Plan Maestro)

[racemize]

This link got posted in reddit and I thought it was pretty good.  Then it turned out it was Plan Maestro!  I figured I'd post it for him.

 

http://variantperceptions.wordpress.com/2012/01/24/charting-banking-xxiv-pre-tax-pre-provision-earnings/

[treasurehunt]

Very nice article. The bit about the adjustments to make to reported numbers was very useful for me.

 

I am curious why the estimate of USB's PTPP earnings is so much lower than the difference between their revenue and noninterest expense. For USB, revenue - noninterest expense = $9.2 billion roughly for the last twelve months. Yet PlanMaestro's estimate of their normalized PTPP earnings is only $7 billion. PlanMaestro, could you elaborate on your calculations for USB?

 

For Q4 2011, USB reported ROE of 16.8% and ROA of 1.62%. I believe Richard Davis has indicated that these are close to normal numbers. At a tax rate of 30.5% for Q4, the pre-tax ROE and ROA numbers -- after provisions for losses -- are 24.2% and 2.33%. PlanMaestro estimates ROE and ROA computed using PTPP earnings to be 22.9% and 2.3%. So either USB's Q4 numbers are way higher than their normalized numbers, or PlanMaestro's estimates are too low.

[PlanMaestro]

Very nice article. The bit about the adjustments to make to reported numbers was very useful for me.

 

I am curious why the estimate of USB's PTPP earnings is so much lower than the difference between their revenue and noninterest expense. For USB, revenue - noninterest expense = $9.2 billion roughly for the last twelve months. Yet PlanMaestro's estimate of their normalized PTPP earnings is only $7 billion. PlanMaestro, could you elaborate on your calculations for USB?

 

For Q4 2011, USB reported ROE of 16.8% and ROA of 1.62%. I believe Richard Davis has indicated that these are close to normal numbers. At a tax rate of 30.5% for Q4, the pre-tax ROE and ROA numbers -- after provisions for losses -- are 24.2% and 2.33%. PlanMaestro estimates ROE and ROA computed using PTPP earnings to be 22.9% and 2.3%. So either USB's Q4 numbers are way higher than their normalized numbers, or PlanMaestro's estimates are too low.

 

I have to recognize when I was writing the article I had in the back of my mind much higher profitability numbers for US Bancorp from previous estimates. It does stand out so I will check it out.

 

And thanks for the bump Racemize.

[PlanMaestro]

could you elaborate on your calculations for USB?

 

OK, here we go TreasureHunt. Here is my best, at the moment, view of the differences on USB's PTPP. The numbers I presented were based on the 2010 10k, I have done more analysis to see how things have changed this year.

 

USB used to have much higher profitability ratios. As an example, for 2009 with an estimate of $7B 2009 PTPP I get:

 

2009

PTPP / Assets: 2.5%

PTPP / Equity: 26.2%

PTPP / Revenues: 42.3%

 

So, I was not crazy. I did remember much higher profitability ratios for USB and that was usually the norm for them. However in 2010, PTPP practically did not move  ($7B again) despite growing revenues  16.5B -> 17.9B so it must be something about higher non-interest expenses that I have not pinpointed yet (USB is not in my watchlist and just follow it as an industry leader). At the same time the balance sheet grew so is no surprise that the profitability ratios deteriorated.

 

Assets 281B ->308B

Equity  26.7->30.3

 

Now, I tried to see if something changed in 2011. We do not have the 10K so there are cash flow statements only for the first 3Qs. With those, I am getting an annualized $7.6B PTPP, that is higher, but the "mediocre" profitability ratios have not changed much

 

2011 Q3 annualized

PTPP / Assets: 2.3%

PTPP / Equity: 22.2%

PTPP / Revenues: 42.8%

 

Considering that the numbers you share are for Q4 2011 I would need that 10K to see if things have changed or if it includes some one-times. For example, the income statement might include profits from sale of REO or loans.

 

I will adjust the PTPP for USB in my spreadsheet to $7.6B. Considering that they are one of the few large banks that have managed to grow it recently it distorts the multiples when compared against the others.

[vinod1]

Good article PlanMaestro!

 

I am little surprised that you start with the Cash Flow statement. Just for banks, I have been ignoring the cash flow statements (I use some of the data points in them). Not the best summary but the following link makes some points about issues with cash flow statement for banks.

 

http://www.nysscpa.org/cpajournal/2007/307/essentials/p26.htm

 

Personally for each business segment, I would try to estimate the Net Interest Revenue, Non Interest Revenue and Non Interest Expense seperately starting with the Financial Statements and noting down any one time or non recurring items. This then gives me the PTPP. Using this I get $9 billion for USB at Q2, 2011, the last time I updated my estimate for USB.

 

Vinod

[vinod1]

A little bit more info at this link

 

http://www.cfo.com/article.cfm/13981499/c_2984321?f=SBU/FinanceProfessor

 

As it stands now, banks can't be reliably compared to each other by their recorded cash flow from operations, the researchers contend. Their observations stem from their study of the cash-flow reports of 15 of the largest independent and publicly traded U.S. commercial banks in terms of total assets as of December 31, 2008. "Right now, operating cash flow for a bank is basically meaningless," says Charles Mulford, director of the Georgia Tech Financial Analysis Lab, who co-wrote the study with fellow accounting professor Eugene Comiskey.

 

Vinod

 

 

 

[PlanMaestro]

I am little surprised that you start with the Cash Flow statement. Just for banks, I have been ignoring the cash flow statements (I use some of the data points in them). Not the best summary but the following link makes some points about issues with cash flow statement for banks.

 

Well Vinod, it took 24 parts of Charting Banking before getting there!

 

At the beginning I put much more emphasis on credit, capital and reserves. I even tackled issues of funding and liquidity when they were of no real importance in this environment (but a source of risks in others).

 

Regarding the links, I could not open the first and the second maybe was butchered by the journalist but it does not have a clear line of attack. That thing about classifying deposits as cash from operations because the very health of a bank's operations depend on its deposit base sounded goofy to me. Anyway, I subtract WC lines from PTPP because they do not have the same meaning as in a non-financial company so there may be something to it.

 

Others opinion?