One Thing I’m Grateful for About Singapore’s Banks

I’ve lately been enamoured with one particular statistic: the number of bank failures in the USA. Can you take a quick guess (no peeking below!) as to how many banks have failed since October 2000? A hundred? How about 200?

Turns out, 515 banks have failed in the USA in that time.

Source: FDIC

Source: FDIC

For me, this hair-raising statistic highlights one thing that I’m very grateful for regarding our local banks DBS Group Holdings (SGX: D05), Oversea-Chinese Banking Corporation (SGX: O39), and United Overseas Bank (SGX: U11): their prudence in taking on risks.

You’ll notice in the chart above, the huge spike in bank failures starting from 2009. That was largely a result of the Great Financial Crisis of 2007-2009 which originated from a collapse in housing prices in the USA. Many Western banks went head over in heels in love with toxic assets related to housing loans, and to top that off, they leveraged themselves to the hilt. Those two actions combined in lethal ways and caused many banks to fail or run into serious trouble.

Bank of America and Citigroup are perhaps emblematic of what I’m talking about even though both didn’t fail: The former clocked combined losses of US$5.8b in 2010 and 2009 while the latter had US$29.7b worth of red-ink on its income statement in 2008.

A bank’s tangible book value to total assets (TBV / TA) is a good measure of the amount of leverage – and by extension, the amount of risks a bank takes – it is willing to bear.

The following chart shows how the TBV / TA ratio changed for the two American banks before, during, and after the Great Financial Crisis. And for good measure, I’ve also thrown in the numbers for Wells Fargo, a very well-managed American bank that went through the financial crisis relatively unscathed.

Source: S&P Capital IQ

Source: S&P Capital IQ

The much lower TBV / TA ratios for BAC and Citi as compared to that of Wells Fargo in the years 2004 to 2008 showed how much more flippant the former two banks were in terms of managing risk.

Here’s how our local trio – DBS, OCBC, and UOB – fared in terms of leverage. And from the chart below, we can once more see the local banks’ prudence in risk-taking that’s also found in Wells Fargo.

Source: S&P Capital IQ

Source: S&P Capital IQ

Foolish Bottom Line

Imagine the anguish of depositors losing their money in our local banks had they failed. That’s not something I’ll want to wish on even my worst enemy. But fortunately for us Singaporeans, it seems that the triumvirate of DBS, OCBC, and UOB have their heads screwed on right when it comes to taking risks.

And for investors investing in the Straits Times Index (SGX: ^STI) itself through index funds, they should be counting their blessings too. The three musketeers together make up almost one-third of the index’s movements. Should they fail, the damage to the index would likely be huge, and that’s before counting the innumerable negative repercussions that would spread out from their collapse.

All told, like I mentioned earlier, I’m grateful for the local banks’ responsible attitudes toward risk-taking.

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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 doesn’t own shares in any companies mentioned.