从期权定价理论看目前中国银行业股票的估值

I copy from : http://spaces.cnwallstreet.com/19599/viewspace_922.html

从期权定价理论看目前中国银行业股票的估值
It is my first time to see someone uses option pricing theory to assess the valuations of China’s listed banks. The Far East Economic Review recently published an article, Buying Into China’s Volatility, written by Mr. Michael Pettis, offering his distinctive views on China banks’ current bubble-like stock price multiples. The followings are my observations from this article:

Mr. Pettis points out that share prices do have information contents, which shall reflect investors’ market assessments on China banks.
However, those contents reflected from China banks’ price multiples should not be treated the same as ones reflected in the major global banks’ valuation matrix (such as HSBC or Citi’s).
Mr. Pettis then uses Fitch, a rating company’s estimates as this article’s foundation. Based on Fitch’s estimation in November 2006, the total amount of unrealized loan losses in the China’s banking system was around $250 billion, which exceeded total capital and reserves by more than 1/3. On top of this awful number, Mr. Petti adds another $300 billion as carve-out amounts by AMCs onto the liability side of the whole banking system. All in all, his conclusion is that China banks’ liabilities values exceed their assets values (for every major bank in China).
Mr. Pettis uses the entire section to discuss the optionality in equity prices. As many finance people already know that equity has a relationship to the operating assets of a firm that is similar to the relationship between a call option and its underlying asset. The author expertly related several option concepts, such as strike price, intrinsic value, time value to the concepts of an operating firm’s total liabilities, positive gap between market value of assets and liabilities and expected volatility in the value of assets, respectively. Based on his implications, China banks’ share prices, if made an analogy to the prices of options, should be totally treated as a sort of time value. He stresses that China banks’ shares have no intrinsic value because their liabilities go above that of their assets. However, no intrinsic value does not mean the expected volatility, hence, time value does not exist for a bank’s share price. He further elaborates his views and says that the value of the Chinese banking franchise is closely tied to China’s long-term economic growth. Frankly speaking, Mr. Petti’s viewpoints remind me of an asset manger’s forthright opinion why he liked Chinese banks, such as ICBC in a PK show hosted by Tiger Hu of Phoenix TV two weeks ago. I still remember, as a president of a so-called China-Australia Investment firm, the asset manager said nothing but two sentences to his PK counter-party: “You know nothing about the economy. I like to invest China’s banks just because of its underlying economic growth.” In my view, this simple-brain fund manager plays the Chinese banking shares barely with his basic instincts and he never thought there is such a sophisticated theoretical foundation---option-pricing theory underlying his basic gutfeel, which was revealed by Mr. Pettis.
The flip side of this technique is when Chinese economy turns substantially sour, banks shares will tumble a big time, warned by Mr. Pettis.
The climax of this article is when the author states that this is not the first time markets have placed high values on the shares of insolvent banks and gave out one recent example of Mexico in 90-92 when it privatized 18 state-owned commercial banks—the entire banking system as part of a process of reform. Mr. Pattis mentions that Mexican banks whose loan portfolios were doubtful and who were in nearly every case technically insolvent, ever sold for an average of more than 3 times book value. Mexico’s biggest bank, Banamex, even had a price to book multiple nearly twice that of Citibank. Later on when crisis hit the Mexico’s economy hard in 94, the banks’ share prices fluctuated brutally. By 98, Banamex traded at little more than one-half of book value.

I have some initial thoughts and comments on this article and also welcome the others to offer their valuable views. First of all, I don’t buy into the author’s idea saying that China’s every bank is still insolvent. Even though I agree that China’s banking system as a whole still carries many unrealized loan losses, the legal corporate arrangements have already separated those major limited liability banking holding companies away from the AMCs. In this regard, we have no evidence whatsoever to declare the insolvency of our major Chinese banks. Secondly, Mexico’s case can be, by no means, compared with China’s economic story in terms of China’s strong foreign exchange reserves, sustainable long-run economic growth, and in-process industrialization and urbanization transition, as well as high personal saving rates, etc. Furthermore, it seems not to be appropriate to compare the Mexico’s banks’ price multiples to Citibank’s when systematic risks hit the US banking system and Citibank prices tumbled into the low teens in early 90s.

Nevertheless I do like one of the implications drawn from the Mexican case---I strongly believe “Drunken day all have their tomorrows!!!!”

Finally, I like the brilliant concept that author uses to price the China banks’ shares----time value. As we know, the option values are determined by six variables---the current value of the underlying asset, the variance in this value, the strike price and the life of the option, the riskless rate of interest, and the expected dividends on the asset, which is illustrated in both the binomial and the Black-Scholes models. Seems to me, the way of time value---the token of the asset volatilities does hit the point, however, the article barely give us one clue on how soon the option will become expire so that the time value will be shrinking all the way. Here I would like to add one more assumption on top of his macroeconomic assumption---The new add-on expiration date is the one when PBOC determines to fully deregulate the interest rates, which will take the government's interest spread subsidies out of this banking system.

So closely watch two things, at least, when investing China banks' time values: the future truning point of the economy and the timeframe for deregulation of interest rates!

(Footnote: Who really cares about intrinsic values, by the way???? Almost all the global monster banks have their intrinsic values. But their price multiples are still traded at the low teens!

As of yesterday's market close, the Citibank, JP. Morgan, Bank of America, Deutsche Bank were all traded between 11-12 times of their 12 month trailing earnings....LoL..)