Would Warren Buffett Buy Oversea-Chinese Banking Corporation?

Warren Buffett knows a thing or two about banks. He has big chunk of change invested in Wells Fargo & Co., which is probably one of America’s most widely-recognised retail banks.

But what would he make of Oversea-Chinese Banking Corporation (SGX: O39)?

Buffett likes businesses with a stable business model. And what can be more lasting than mortgages and loans in their various guises that include car loans, personal loans and commercial loans.

And let’s not forget about the bane of most bank customers, namely, fees. Banks can charges fees for just about anything. So, even when interest rates are at rock bottom, the fees just keep coming in, regardless of whether times are good or bad.

OCBC has a growing investment-banking division too. It accounts for around a third of group revenues.

OCBC’s prudent approach has helped it to deliver stable earnings. Since 2004, Net Income has risen steadily from S$1.1b to S$3.8b. It even emerged relatively unscathed from the financial crisis of 2008.

The bank’s Net Income Margin, which is a measure of its profitability, is around 48%. It implies that the bank generates S$48 of profit on every $100 of revenues. This may not be a direct measure of the bank’s efficiency but it can indicate that its high Interest Margin is being converted into bottom-line profits.

OCBC shares are less volatile than the market, which is something that Buffett is likely to look for. This can suggest low specific stock risk that cannot be explained by macroeconomic activity. Or put another way, OCBC behaves more a like a utility that a high-octane investment bank.

Warren Buffett is likely to warm to OCBC. It feels and looks like the kind of bank that would not look too out of place in his portfolio. At the current price of S$10.80 a share, OCBC is valued at slightly more than 10 times historic profits. It has been cheaper, but not significantly so.

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