Essay on analysis of SDB

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1.0 Abstract
This report aims to provide an analysis of a proposed investment in Shenzhen Development Bank (SDB) by Newbridge in 2002 and assess whether the P/B ratio of 1.6 for Newbridge to pay for its 18% stake in SDB is appropriate. The analysis of Newbridge’s acquisition of SDB’s stocks is based on several aspects of SDB’s asset quality, earnings capability and capital adequacy. According to price-to-book ratio of SDB’s industry peers and some acquisition precedents by foreign investors, Newbridge made a correct decision that it paid 1.6 times book value of SDB’s stake on a basis of SDB’s performance. This is because of SDB’s high P/B ratio and low ROE indicating that SDB’s share price was overvalued; therefore, Newbridge’s
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This indicates that SDB’s ability of making profits is stronger than the average level. Meanwhile, SDB’s non-interest income level and operating expense were above the average level in 2002. Nevertheless, SDB’s ROAA was 0.9% in 2000 and was only 0.3% in 2002. This ratio was merely half of the average ROAA of other five joint-stock banks in 2002 indicating that SDB’s profitability of the assets was relatively weak as well as its ROAE at the same time. SDB’s ROAE was only one-third of the average ROAE of five joint-stock banks. Therefore, SDB’s performance was not good compared with its industry peers; the reason of SDB’s bad performance is that an increasing assets generating low net income.
3.3 Capital adequacy
In commercial banking, capital adequacy ratio (CAR) is used to monitor a bank’s situation of capitalization by regulators and managers. CAR is calculated as the sum of tier 1 capital (equity and retained earnings) and tier 2 capital (subordinated debt and reserves) and dividing it by its risk-weighted assets. SDB’s CAR decreased from 10.6% in December 2001 to 9.5% in December in 2002, but still above the Chinese regulatory floor of 8%. It is particularly worth mentioning here that SBD’s CAR was 0.7% higher than the average CAR of other five joint-stock banks in 2002. Not all the time the CAR is good if high; a high CAR means that a bank’s large amount of money is stuck in
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