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Foolish Face-off: DBS vs. Wells Fargo

DuelWelcome! The Foolish Face-off series helps us make simple comparisons between two companies with similar business operations. As an investor, such choices can be decidedly tougher than picking dim-sum over eggs benedict for breakfast and we hope to make life a little easier for you.

This week, we’ll be looking at an industry that’s so vital for a country’s capital markets and economic activity – banking. Let’s introduce our contenders, Singapore’s DBS Group Holdings (SGX: D05) and Wells Fargo (NYSE: WFC) from the US of A.

Introduction

DBS is Singapore’s largest bank by market value, edging out second-placed Overseas-Chinese Banking Corporation’s (SGX: O39) value of S$38.9b by $4.4b. DBS focuses its operations in six key markets; Singapore, Hong Kong, China, Taiwan, Indonesia and India. Last year, the bank’s 18,000-strong staff served 5.3m retail customers and 180,000 corporate clients in those markets.

DBS’s services include corporate, wholesale and consumer banking, as well as asset management, securities brokerage and equity and debt fund-raising among others. In addition, it has an Islamic banking arm, The Islamic Bank of Asia. The Sharia-compliant bank allows DBS to tap into a growing Islamic finance market that’s estimated by Standard and Poor’s to be about US$1.4 trillion at the end of 2011.

Wells Fargo is headquartered in the USA and besides its prominence as the largest bank in the USA by market value, it is also well-known as one of billionaire Warren Buffett’s largest stock holdings. Buffett’s company, Berkshire Hathaway (NYSE: BRK-A), owns about 8% of Wells Fargo as of 31 Dec 2012. That makes the American bank occupy almost one-fifth of Berkshire’s investment portfolio.

Wells Fargo has a presence in more than 35 countries and a team of 265,000 members at the end of 2012. Last year, it served 70m customers for their banking, insurance, investments, mortgage, and consumer and commercial finance needs and holds more than US$1.4 trillion in assets. Some of the accolades it holds include it being the number one small-business lender in the USA in the past ten years as well as the second largest provider of private student loans.

DBS Wells Fargo
Market Cap S$43.4b US$203.4b
Total Assets S$373.3b US$1,436.6b
All data sourced from S&P Capital IQ

Round 1: Valuation

The first round of the Foolish Face-off sees us comparing the valuations of the two banks’ based on its Price-to-Tangible Book (PTB), Price-to-Earnings (PE) and its dividend yield. We want to find out which bank is offered at a cheaper price in the market, an important consideration when investing.

DBS Wells Fargo
PTB 1.56 1.64
PE 11.3 10.7
Dividend Yield 3.2% 2.0%
Share Price S$17.77 US$38.45
*PTB and PE are calculated using the banks’ financial figures for the last-12-months.**The dividend yield is based on the banks’ annual dividends for their last completed financial year.

We can see that DBS edges out its American counterpart with a lower PTB and higher dividend yield. For that, Round 1 goes to DBS!

Winner: DBS

Round 2: Profitability

The second round sees the banks being judged on their profitability through three metrics: net-interest margin (NIM), return on assets (ROA) and return on equity (ROE). NIM measures the difference between interest earned by the bank on its earning-assets and the interest it has to pay out from its fund-sources.

ROA and ROE measures how efficient the bank is at turning each dollar of asset and shareholder’s capital, respectively, into profit. It’s useful to note that ROA is actually a metric that Buffett focuses on when valuing banks.

DBS Wells Fargo
NIM 1.7% 3.8%
ROA 1.2% 1.4%
ROE 11.6% 12.9%
*Financial figures are based on the banks’ last completed financial year.

 

It seems that Wells Fargo is by far the more profitable bank, beating out DBS on all three metrics with its NIM being more than twice that of DBS’s.

Winner: Wells Fargo

Round 3: Growth

The Foolish Face-off’s final round concerns the banks’ growth. Banks, like any other business, becomes more valuable for shareholders if they can grow their revenues and profits. Because of that, we’ll be looking at compounded annualised growth rates for the banks’ revenue and earnings per share (EPS) growth. Dividends are a source of income for shareholders and we’ll want to look at how it’s changed over the years as well.

DBS Wells Fargo
Revenue Growth CAGR 8.2% 15.8%
EPS Growth CAGR 9.4% 7.1%
Dividend Growth CAGR -2.9% -7.9%
*Financial figures are based on the banks’ last five completed financial years.

Despite Wells Fargo’s massive size, it’s actually able to grow its revenue at a faster rate than DBS – elephants can gallop at times, it seems. But, Singapore’s representative prevails with better growth in EPS and a dividend that’s shrinking at a slower pace.

Winner: DBS

Foolish Bottom Line

Final Score: 2-1 to DBS!

This friendly competition between two of the largest banks in their respective countries has DBS besting Wells Fargo with cheaper shares and better growth.

But, do not take this for a definitive conclusion. Banks are very complicated companies and a much deeper dive into their asset-base, capital structure, business activities etc. would be needed before any investing-related conclusions can be given.

We hope you enjoyed the latest instalment in the Foolish Face-off and do stick around if you’ll like to learn more about other businesses as we bring you even more Face-offs in the future.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing owns Berkshire Hathaway’s B-class shares.