DBS, UOB, OCBC: Which ones to invest in and is it worth the investment?

If you have been studying the list of companies on the Singapore Stock Exchange (SGX), you will find that the three Singapore banks – DBS Group Holdings, United Overseas Bank Limited (UOB) and Oversea-Chinese Banking Corp (OCBC) – are one of the more recognizable names there.

Banks, which are the benchmarks of the country’s economy, enjoy a good reputation with stable returns, their shares are not what you would call affordable.

As of 11:09 a.m. (Aug. 31), DBS, UOB and OCBC shares are trading at $ 21.07, $ 19.76 and $ 8.77, respectively.

Before the market crash in March 2020, stocks ranged between $ 25 and $ 26 for DBS and UOB, and between $ 10 and $ 11 for OCBC.

Investing in these bank stocks was not so accessible previously, when the minimum lot size was 1,000. This means that each exchange of, say, DBS, will cost $ 25,000. When the lot sizes were reduced to one-tenth, it is now easier for most retail investors to own a part of a bank.

However, that is only part of the consideration.

These are some of the key valuation metrics to determine whether these banks are worth the investment or not.

The P / E ratio, which is calculated by taking the current price of the company’s stock times its earnings per share (EPS), is the most common way to determine the value of a stock.

Traditionally, a lower P / E ratio means that the stock is trading at a lower price compared to its fair value. In contrast, a high P / E ratio means that the stock is overvalued in the stock market.

Today, a higher P / E ratio can also represent investors’ growth expectations. Which means that in addition to your current P / E ratio, you should also look at the bank’s historical P / E ratio and the overall banking sector P / E ratio.

As of August 31, the P / E ratios for DBS, UOB and OCBC are 9,704, 9,178 and 10,059 with EPS of $ 1.86, $ 1.81 and 64 cents, respectively.

Another popular metric is the price-to-book ratio, which takes the number of the company’s market value divided by its book value.

Market value is calculated by the price of the company’s shares, multiplied by the number of shares it has. The book value is taken by the amount of net assets that a company has.

The lower the ratio, the more undervalued a company will be considered. The opposite is true.

As of August 31, the P / B ratios for DBS, UOB, and OCBC are 0.986, 0.819, and 0.801.

Banks are in the loan business. The more they lend, the more they earn from interest. However, not all borrowers can and will repay on time. Some simply default on their loans.

Delinquent loans refer to loans that banks have to cancel if more than 90 days have passed without the borrower repaying interest or fees. The figure is then compared to the bank’s total loan book. The smaller the ratio, the better.

DBS and UOB delinquencies remained stable quarter-on-quarter at 1.5% and 1.6% respectively, while OCBC delinquencies increased 0.1 percentage points to 1.6% during 1H20.

This ratio represents the strength of a bank’s capital. It is the measurement of the capital of a bank against its assets. The higher this ratio, the more likely it is that the bank will weather a financial recession.

US banks must maintain a CET1 ratio of at least 4.5%. Singapore banks are subject to a more stringent requirement of 6.5%. Still, all three banks are well above that mark at 13.7% (DBS), 14% (UOB) and 14.2% (OCBC).

This measures the performance of banks in their investment operations. A higher NIM ratio means that the bank can get a larger difference between its interest income and cost. In short, more profitable.

For 2Q20, the NIM indices for DBS, UOB and OCBC stood at 1.73%, 1.48% and 1.71%.

Investors who crave dividend income love the three local banks. For years, they have been consistently paying dividends with a 5-6% annual return. Interest on savings accounts can’t even come close to that profitable level.

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