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 In details, as lack of credit policy, authorization system, approval mechanism and poor design for credit functions, the credit monitor and control is inefficient for SDB and also slow it’s the responsive for markets. This directly has bad influence on SDB’s business portfolio and it’s operating performance. Secondly, SDB also has governance problems as a state-owned bank. As a result, SDB often has to lend money to municipal projects and these borrowers often also the shareholder of SDB. Therefore it arises conflicts of interest issue, which affects both SDB decision-making and asset quality as well. When SDB cannot manage independent and make it’s own decisions. SDB more likely to lend loan for less profitable projects or even SDB may make loan that it knows borrowers are unlikely pay back. This causes both ROAA and ROAE of SDB are lower than average. Moreover, as most of board members are ex-government officers and the compensation for current managers are not associated with their performance. There are no incentives for board members to discipline the current management team and perform fiduciary duty. Therefore the current management team will not be working efficiently and in the best interest of all stakeholders, which is increasing the value of SDB. So the operating expense/operating income is also high for SDB. Furthermore, the government regulation also limits
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