finance
Introduction
In this report, I will analyze the financial performance of SDB by comparing it with its industry peers. SDB’s asset quality, earnings capability and capital adequacy are the three aspects I will pay attention to when evaluate its financial performance. Then I will discuss whether it is appropriate for Newbridge to pay 1.6 times book value for 18% shares in SDB. And what is appropriate range for the price Newbridge can offer. The objective of this report it to assist Newbridge to make right decisions on whether to invest SDB or not and if invest what is appropriate price to pay for each share.
Part 1 SDB’ financial performance
In order to analyze the financial performance of SDB, there are three aspects we should consider. And they are asset quality, earnings capability and capital adequacy of SDB. I will exam its asset quality first.
Asset quality
First of all, the asset quality of SDB seems in a big problem. There are two important asset quality measures that managers and analysts should pay attention to, they are NPL ratio (NPL/Gross loan) and NPL coverage ratio (LLR/NPL). Here, NPL means nonperforming loan, it is a sum of borrowed money upon which the debtor has not made his or her scheduled payments for at least 90 days. Based on the data from Exhibit 10 (Jin, Xuan, & Bai, 2009), NPL ratio for SDB is 11.6% in 2002 and the average NPL ratio is 7.3% for other joint-stock banks in china. Higher NPL ratio indicates SDB got a worse quality of the loan portfolio, which means the SDB got more nonperforming loan compare to industry peers. Moreover, I think the NPL number SDB reported is likely to be too low. Because Newbridge conduct the due diligence and they think the actual NPL is higher. In details, SDB was a government-controlled bank. And as a result, SDB has poor governance and risk management issues. For example, same as other banks in china, officers may trend to lend loan to their favorite clients due to poor
In this report, I will analyze the financial performance of SDB by comparing it with its industry peers. SDB’s asset quality, earnings capability and capital adequacy are the three aspects I will pay attention to when evaluate its financial performance. Then I will discuss whether it is appropriate for Newbridge to pay 1.6 times book value for 18% shares in SDB. And what is appropriate range for the price Newbridge can offer. The objective of this report it to assist Newbridge to make right decisions on whether to invest SDB or not and if invest what is appropriate price to pay for each share.
Part 1 SDB’ financial performance
In order to analyze the financial performance of SDB, there are three aspects we should consider. And they are asset quality, earnings capability and capital adequacy of SDB. I will exam its asset quality first.
Asset quality
First of all, the asset quality of SDB seems in a big problem. There are two important asset quality measures that managers and analysts should pay attention to, they are NPL ratio (NPL/Gross loan) and NPL coverage ratio (LLR/NPL). Here, NPL means nonperforming loan, it is a sum of borrowed money upon which the debtor has not made his or her scheduled payments for at least 90 days. Based on the data from Exhibit 10 (Jin, Xuan, & Bai, 2009), NPL ratio for SDB is 11.6% in 2002 and the average NPL ratio is 7.3% for other joint-stock banks in china. Higher NPL ratio indicates SDB got a worse quality of the loan portfolio, which means the SDB got more nonperforming loan compare to industry peers. Moreover, I think the NPL number SDB reported is likely to be too low. Because Newbridge conduct the due diligence and they think the actual NPL is higher. In details, SDB was a government-controlled bank. And as a result, SDB has poor governance and risk management issues. For example, same as other banks in china, officers may trend to lend loan to their favorite clients due to poor