Monday, September 03, 2007

DBS, UOB & OCBC: A Comparative Snapshot

This research note is a brief comparative snapshot of the 1H07 performances of the three bank majors listed on the SGX.

Overview

As we can see in the table of comparative financials above, DBS is the largest of the three banks, with the greatest interest income, total income, and total assets of the three banks. OCBC, despite being a smaller bank, has a significant life insurance business in the form of its 87% stake in Great Eastern, and this boosts its non-interest income to comparable levels of both UOB and DBS. UOB is somewhere in the middle in terms of size between OCBC and DBS.

An interesting point of note is that while DBS and UOB both take charges profit while adjusting for allowances, OCBC actually takes an addition to profit from its allowances. This was a point of heated argument between Morgan Stanley Banking analyst Matthew Wilson (who like me is a Uni Melbourne graduate) and the CEO of OCBC, David Conner, during the latest results press conference.

Comparative Ratios

The table above lists some key performance ratios of the three firms, as well as the average of the three, as a comparative benchmark.

In terms of revenue mix OCBC clearly has the highest proportion of income coming from non-interest income. This can be attributed to the operations of Great Eastern which forms a significant portion of its balance sheet and income statement.

On the commercial banking side, we see that DBS is able to squeeze more out of its assets than the other two banks, and this manifests itself in the highest net interest margin of the three. DBS also has the lowest NPL ratio of the three banks.

OCBC has the lowest cost/income ratio of the three banks and DBS has the highest.

In terms of ROA and asset turnover, it would appear that UOB has the strongest position. UOB also has strong capital adequacy ratios. However its ROE is the lowest of the three.

Relative Valuation

Given that there is not much space left in Singapore to expand operations for the banks, the primary space for growth lies overseas, in the greater China region and the South East Asian region. Furthermore, there is intense competition in Singapore, with Citibank Sg recently mounting an aggressive campaign to grow its consumer business in Singapore. In greater China it would appear that all three banks have opened up operations, with DBS and UOB seeming to be the most aggressive in wanting to expand there.

In terms of non-interest income, DBS seems to be the most aggressive, and it has hired experienced investment bankers and appears to be trying to remodel the bank into a full-fledged universal bank. It will take some time for DBS to build up its capital markets network and capabilities.

Valuation wise there is not much to choose between the three. DBS and UOB are very similarly priced in terms of P/E and P/B. OCBC is priced slightly differently and this is probably due to its insurance assets.

An investment in the banks at current prices will therefore have to depend on the investors’ view of the recent turmoil in the credit markets and the broader economy, and the impact this will have on the banks going forward.

3 comments:

Anonymous said...

Hey Inspired,
Really appreciate your in-depth objective analysis. Helps a lot especially when I want to check my numbers with people who know what they're doing but aren't trying to sell =)

You mentioned you run a willow fund. How as it been doing in the recent market turmoil?

Regards,
JF

InSpir3d said...

Hi JF.

I'm glad u find the analysis useful.

Fortunately for me i was mostly in cash before the subprime correction, about 85% cash. After the correction i took the opportunity to pick up some stocks and in the last 2 weeks of august i went from 15% to about 85% invested, so i'm sitting on some gains so far.

i will keep track of the fund's performance and post a chart from time to time.

cheers

Anonymous said...

Hi which bank would u choose to work as a personal banker selling insurances and such?