Is OCBC toast?

Around three weeks ago, on 22nd May 2013 to be precise, the Straits Times Index (SGX: STI) hit a five-year high of 3,454 points.

At the time, people were talking about how rosy the world was and how happiness would prevail, no matter what. (Ok, I made up that last part). But three weeks later, the STI is down 8.2%.

One component of the STI, Oversea-Chinese Banking Corporation (SGX: O39), which is better known as OCBC, has fallen even more. It is down 9.6% from its high of $11.17.

So, is it time to flee from OCBC now that it is down by more than the benchmark index? Or could this be an opportune moment to take a second look at this banking stock?

I think OCBC warrants a second look.

Local banks, including OCBC, are conservatively leveraged, thanks to stringent criteria set by the regulator, the Monetary Authority of Singapore. Because of this, our quoted banks that also include DBS (SGX: D05) and United Overseas Bank (SGX: U11), escaped relatively unscathed during the sub-prime crisis in 2008. The same can’t be said of many banks in the West.

What’s more, even if America decides to temper its enthusiasm for printing money and, maybe, increase interest rates, our banks should still continue to do well. Five years down the road, I suspect people will still visit their OCBC branch to bank their pay cheques and apply for loans.

In terms of the hard numbers, OCBC’s Return on Asset (ROA) of 1.4% is the highest amongst our local banks. Its Price-to-Earnings ratio stands at 8.7, and it is the lowest amongst the local banks.

Its dividend yield is 3.3%. The dividend payout ratio in 2012 was a conservative 0.29. This could suggest room for more dividends to be paid out should OCBC continue to do well, increasing the dividend yield on cost.

OCBC has also been consistently buying back its own shares. This month, OCBC has bought back 1.03 million shares. It previously bought back its own shares in February, March, April and May. In total, 8.3 million shares have been repurchased this year, which represents 0.24% of its outstanding shares. Buybacks were also carried last year and in previous years too.

OCBC is also focussed on serving its customers. It recently launched an online service called “Money In$ight” in which customers can keep track of their spending, set budgets, create sub-accounts to hit certain milestones in their lives, with colourful charts and figures to make saving more fun.

No one can predict what the market is going to do tomorrow. However, one thing is certain: the intrinsic value of a business doesn’t change just because people are selling its shares. So, any price weakness might be a good time to buy the shares you have always wanted to own at a discount.

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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 Director David Kuo doesn’t own shares in any companies mentioned.