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Is Overseas-Chinese Banking Corp Limited Good Enough to Buy? – Part 1

Overseas-Chinese Banking Corp Limited (SGX: O39), or more popularly known as OCBC, is one of the trio of major banks in Singapore with the other two being DBS Group Holdings Ltd (SGX: D05) and United Overseas Bank Ltd (SGX: U11).

To distill the strengths & weaknesses of OCBC as an investment, I would like to turn to an article from fellow US Fool John Maxfield. In his article, John suggested three quick ways to evaluate a bank.

Let’s run through each suggestion, shall we?

The Annual Return on Equity

The first thing which John suggests is to do a “temperature check” on the bank. He explains further here:

“The important thing to keep in mind whenever you’re investing in banks is, to your point about banking panics, if you go back and you look at the history of banking, the banking industry more than probably any other industry is really susceptible to these infrequent, intermittent panics that cause a whole bunch of them to fail, or if they don’t fail to egregiously dilute their shareholders.

When you’re picking a bank stock, the very first thing you want to do is just do a temperature check to make sure that the bank you’re looking at is not susceptible to that.

The easiest way to do that is just to look at its annual return on equity over the past, say 10 years. Pick out the lowest annual return on equity [ROE]. If that number is negative, it means that the bank took relatively large losses in the financial crisis.”

With that, I have summarized OCBC’s historical ROE for the past ten years in the chart below. As you can see, OCBC has managed to wade through the Global Financial Crisis of 2008/2009 relatively unscathed in terms of its ROE.

image

Source: Morningstar

With more than 80 years in operation and a ROE of more than 10% over the past decade, OCBC passes the first test set out by John.

Jump in here for the next step!

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.