Last month, Singapore’s three major banks announced their financial results for the year ended 31 December 2019.
For those uninitiated, those banks are — DBS Group Holdings Ltd (SGX: D05), Oversea-Chinese Banking Corporation Limited (SGX: O39) and United Overseas Bank Ltd (SGX: U11).
The banks, which make up around 40% of the Straits Times Index, performed well financially in 2019.
For 2019, the banking trio averaged a net profit of S$5.2 billion, up 10.1% year-on-year.
Among them, DBS reported the highest net profit of S$6.39 billion, translating to an increase of 14% compared to a year back.
For investors who are looking to pick the best of the lot, here’s a comparison of the banks’ 2019 critical financial ratios, including their valuations.
Profitability Ratios
The following table shows a few key ratios that give us a better picture of the banks’ profitability (the “best” metrics are in bold):
| Bank | Net Interest Margin | Cost-to-Income Ratio | Return on Assets | Return on Equity |
|---|---|---|---|---|
| DBS | 1.89% | 43.0% | 1.13% | 13.2% |
| OCBC | 1.77% | 42.7% | 1.26% | 11.4% |
| UOB | 1.78% | 44.6% | 1.08% | 11.6% |
Net interest margin (NIM): This is similar to the operating margin for a non-banking outfit. The NIM shows the average interest margin that a bank is earning from its borrowing and lending activities.
Among the banking giants, DBS had the highest NIM for 2019 of 1.89%.
Cost-to-income ratio: This ratio measures the non-interest expense of a bank as a percentage of its revenue. It is used to gauge a bank’s efficiency and productivity. Generally, the lower the ratio, the more efficient a financial institution is.
Among the banking trio, OCBC had the lowest cost-to-income ratio for 2019 of 42.7%.
Return on assets and return on equity: These tell us how effective a bank’s management is in maximising the profits earned from shareholders’ capital.
Among the three banks, OCBC had the best return on assets, and DBS had the highest return on equity (ROE) for 2019.
In fact, DBS’ 2019 ROE is the best ever for the bank.
DBS CEO Piyush Gupta said in the bank’s latest earnings release that its ROE figure “demonstrates a franchise that delivers high quality results.”
Balance Sheet Ratios
Here is a table showing the key ratios that can give us clues on how strong the banks’ balance sheets are (the “best” metrics are in bold):
| Bank | Loan-to-Deposit Ratio | Non-Performing Loans Ratio | Leverage Ratio | Average All-Currency Liquidity Coverage Ratio |
|---|---|---|---|---|
| DBS | 88.5% | 1.5% | 7.0% | 136% |
| OCBC | 86.5% | 1.5% | 7.7% | 155% |
| UOB | 85.4% | 1.5% | 7.7% | 146% |
Loan-to-deposit ratio: This ratio measures a bank’s liquidity. The sweet spot for this ratio is usually between 80% and 90%. Banks with a loan-to-deposit ratio below that range may not be maximising the capital they have.
On the other hand, if a bank’s loan-to-deposit ratio is above that range, it might run into liquidity problems when there is a high withdrawal rate on deposits, especially during an economic downturn.
Among the three banks, DBS was the best at maximising the loans and deposits it had for 2019, given that it had the highest loan-to-deposit ratio in that year.
Non-performing loans (NPL) ratio: A non-performing loan is a loan on which the borrower is unable to pay off interest or the principal amount. The lower the ratio, the better it is for a bank.
It’s a tie among the three banks for 2019 as all have an NPL ratio of 1.5%.
Leverage ratio and liquidity coverage ratio: These ratios show the ability of a bank to meet its financial obligations. In general, the lower the leverage ratio, the better.
Meanwhile, for the liquidity coverage ratio, we’re looking for high numbers.
Among the three banks, DBS had the lowest leverage ratio while OCBC had the highest liquidity coverage ratio for 2019.
Valuation Ratios
The table below reveals the banks’ valuation numbers (the “best” metrics are in bold; share price as of time of writing on 3 March 2020):
| Bank | Price | Price-to-Book (PB) Ratio |
Price-to-Earnings (PE) Ratio | Dividend Yield |
|---|---|---|---|---|
| DBS | S$24.42 | 1.27 | 9.9 | 5.0% |
| OCBC | S$10.72 | 1.03 | 9.4 | 4.9% |
| UOB | S$24.44 | 1.09 | 9.6 | 4.5% |
OCBC seems to offer the best value among the three banks with its lowest PB and PE ratio.
However, it loses out to the other banks in terms of dividend yield.
Income investors would love DBS as it has the highest dividend yield among the banks at 5.0%.
Going forward, DBS said that it plans to dish out an annualised dividend of $1.32 per share, instead of $1.23 for 2019.
The higher dividend is “in line with the policy of paying sustainable dividends that grow progressively with earnings”.
Using the guided dividend payout, DBS’ dividend yield would rise to 5.4%.
As for UOB, its board has declared a special dividend of S$0.20 per share in 2019, similar to 2018.
Including that dividend, UOB’s adjusted dividend yield would be 5.3%.
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Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock. The writer may have a vested interest in the companies mentioned.
