Which Local Bank Is The Best Value Investment?

The Singapore Exchange lists three local banks, namely DBS Group Holdings (SGX: D05), Oversea-Chinese Banking Corporation Limited (SGX: O39) and United Overseas Bank Limited (SGX: U11).

Combined these three blue chip stocks, each a component of the Straits Times Index (SGX: ^STI), have a market capitalisation of over S$125 billion.

A quick look at the fundamental measures of value suggests that there is not much between the three banks.

All three banks have a price to earnings ratio around the market average of 14. DBS and UOB are priced at 16 times their earnings, slightly above the average, whilst OCBC is priced at just 13 times its historical earnings, which is slightly below the average.

The dividend yields do little to distinguish the banks from one another either. Once again OCBC, the provider of various financial and wealth management products edges in front. Its dividend yield of 3.5% is marginally better than the 3.1% from UOB and 3% from DBS.

DBS is the largest of the three banks with a market value of S$49b. It comes out looking best when comparing the companies’ price to books. At a ratio of 1.3, the same ratio as for UOB, DBS does not offer investors much in the way of a margin of safety.

However, it should be noted that for these three banks, each with steady cash flows and strong management teams, a very wide margin of safety may be less of a necessity. Nevertheless, the ratio still makes DBS and UOB look slightly cheaper than OCBC, which is priced at a 40% premium to its book value.

A look at the third-quarter earnings for 2014 shows us that all three banks are performing well. In each case quarterly profits were up on last year. UOB saw a 7.2% increase in net profits year on year. It was up 17% at DBS and OCBC saw a whopping 62% jump in its quarterly net earnings.

So what is left to distinguish them?

Not a lot, really. But that is not really too surprising because banks, in the main, tend to be largely undifferentiated.

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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 Adam Kuo doesn’t own shares in any companies mentioned.