At What Price Would Benjamin Graham Buy Oversea-Chinese Banking Corporation?

Compared with DBS (SGX: D05) and UOB (SGX: U11), OCBC (SGX: O39) might currently be the cheapest of the three banks in Singapore’s Straits Time Index (SGX: ^STI).

Of the three banks it has the lowest price to earnings ratio at just 10. DBS and UOB are valued at around 12 times trailing profit.

When compared to the wider market, where we see an average P/E of about 14, OCBC’s P/E ratio could be seen as low. Its earnings multiple translates into an earnings yield of just below 10%. This is comfortably above the 4% to 5% mark that someone seeking a return of twice the risk free rate would consider to be good value.

In fact, on this metric OCBC could see its share price double to over S$20 a share before it could be deemed to be too expensive.

With the return on 10-Year US Treasury Bonds falling recently, the dividend yield on offer from OCBC also exceeds comfortably exceeds those of the risk-free rate. If we look to only match the risk-free return of 2%, then OCBC could see its share price rise to around S$18 a share, before the dividend yield would fall below that.

Strong growth in OCBC’s net income could also be seen as encouraging. Between 2009 and last year, consistent growth in the company’s top line has seen its net income more than double, while its P/E ratio has been falling. The company’s fourth quarter earnings for 2014 add to this positive outlook.

The only metric where OCBC fails to match those of a value share is its price to book ratio. This currently stands at 1.35. For the much-desired price-to-book ratio of less than one, value investors would need to see the share price fall by 25% to S$7.80 a share.

With the price to book ratio unlikely to fall to one – except in exceptional circumstances – investors will have to ask themselves which of the value measures they deem most important.

Could the price to book ratio of below one, the key margin of safety for value investors, be forgone in the case of a company that seems significantly under-priced on its other measures of value?

The Motley Fool's purpose is to help the world invest, better. Click here now for your FREE subscription to Take Stock -- Singapore, The Motley Fool's free investing newsletter. Written by David Kuo, Take Stock -- Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.

Like us on Facebook to keep up-to-date with our latest news and articles. The Motley Fool's purpose is to help the world invest, better.

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.