Is Overseas-Chinese Banking Corp Limited Good Enough to Buy? – Part 2

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.

After taking a “temperature check” in the first step, we can move onto the next one which involves a gauge of the efficiency of a bank in turning in consistent profits.

Efficiency ratio

The focus here would be on the efficiency ratio. John explains further:

“The efficiency ratio measures the percentage of a bank’s net revenue that’s consumed by its operating expenses. The purpose of this second figure is to gauge whether a bank has what it takes to generate outsized returns.

An efficiency ratio in the low 60% range or below is important not only because it means that more revenue will filter down to a bank’s bottom line, but also because efficient banks have less incentive to compromise their underwriting standards by originating overly risky loans in exchange for higher yields.”

Said another way, the efficiency ratio tells how much a bank has to spend to generate each dollar of revenue. With that, I have summarized the efficiency ratio for OCBC for the last ten years in the chart below.

Efficiency Ratio OCBC

Source: S&P Capital IQ

As you can see, OCBC has cleared the efficiency ratio hurdle set out by John by quite a fair margin (in general, the lower the efficiency ratio, the better). Over the last five years, OCBC’s efficiency ratio as averaged at around 40.5%.

You can check out here for the final 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.