If you’ve been studying the list of companies on the Singapore 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 most recognisable names on there.
The banks – which are the bellwether of the country’s economy – enjoy good reputations with stable returns, their shares aren’t what you’d call affordable.
As at 3.24 pm (on August 31), shares in DBS, UOB and OCBC are trading at $20.85, $19.61, and $8.67, respectively.
Before the market crash in March 2020, shares were hovering at the $25-$26 mark for DBS and UOB, and between the $10 and $11 mark for OCBC.
Investing in these bank stocks weren't so accessible previously, when the minimum lot size was 1,000. This means each trade of say, DBS, will cost $25,000. When the lot sizes were reduced to a tenth, it is now easier for most retail investors to own a piece of a bank.
However, that’s just one part of the consideration.
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Here are some of the key valuation metrics to determine whether these banks are worth the investment or not.
Price-to-earnings ratio (P/E ratio)
The P/E ratio, which is calculated by taking the company’s current share price by its earnings per share (EPS), is the most common way to determine a share’s value.
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Traditionally, a lower P/E ratio means that the stock is trading at a lower price compared to its fair value. Conversely, a high P/E ratio means that the stock is overvalued on the stock market.
Nowadays, a higher P/E ratio may also represent growth expectations from investors. Which means that apart from its current P/E ratio, you should also look at the bank’s historical P/E ratio, and the P/E ratio of the overall banking sector.
As at 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.
Price-to-book ratio (P/B ratio)
Another popular metric is the price-to-book ratio, which takes the number of the company’s market value divided by its book value.
The market value is calculated by the share price of the company, multiplied by the number of shares it has. Book value is taken by the amount of net assets a company has.
The lower the ratio, the more undervalued a company is deemed. The reverse is true.
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As at August 31, the P/B ratios for DBS, UOB, and OCBC are 0.986, 0.819, and 0.801.
Non-performing loans (NPL)
Banks are in the business of lending. The more they lend, the more they earn from interest. However, not all borrowers can and will pay back on time. Some simply default on their loans.
Non-performing loans refer to loans that the banks have to write off if more than 90 days have passed without the borrower repaying the interest or instalments. The figure is then compared to the bank’s total loan book. The lower the ratio, the better.
DBS and UOB’s NPL remained stable quarter-on-quarter at 1.5% and 1.6% respectively, while OCBC’s NPL rose 0.1 percentage points to 1.6% for 1H20.
Common Equity Tier-1 ratio (CET1 ratio)
This ratio represents a bank’s capital strength. It is the measurement of a bank’s capital versus its assets. The higher this ratio is, the more likely it is for the bank to see it through a financial downturn.
US banks are required to maintain a CET1 ratio of at least 4.5%. Singapore banks are subjected to a stiffer requirement of 6.5%. Even so, all three banks are well above that mark at 13.7% (DBS), 14% (UOB), and 14.2% (OCBC).
Net interest margin ratio (NIM ratio)
This measures how well the banks are making on its investment operations. A higher NIM ratio means the bank is able to eke out a bigger difference between its interest income, and cost. In short, more profitable.
For 2Q20, the NIM ratios for DBS, UOB, and OCBC, stood at 1.73%, 1.48%, and 1.71%.
Dividends
Investors hankering dividend income adore the three local banks. For years, they’ve been consistently paying dividends at a yield of 5% to 6% a year. Interest from saving accounts can’t even go near that level of returns.
Based on CGS-CIMB Research's forecast in their August 10 sector note, analysts Andrea Choong and Lim Siew Khee have forecast DBS, UOB, and OCBC's FY20 dividends to be at 87 cents, 78 cents, and 31.8 cents respectively. This translates to yields of 4.22%, 3.98%, and 6.08% for DBS, UOB, and OCBC for the FY20 ending December, respectively.
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