Is Overseas-Chinese Banking Corp Limited Good Enough to Buy? – Part 3

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.

Here’s where we are so far: We’ve taken a “temperature check” on OCBC in the first step and have looked up the bank’s efficiency ratios over the past 10 years in the second step. On the third, we’d be scrutinizing the bank’s top-line growth relative to its assets.

Top-line relative to assets

John brings together the three steps in the following explanation:

“The last thing you’re going to want to look at — after we’ve gone through and temperature checked the bank to make sure that it has probably a good chance of making it through the next crisis in good shape, if not even thriving during the next crisis, then making sure that as a general rule it’s a relatively highly profitable bank because its expenses take up a relatively small proportion of its net revenue — then you’re going to want to swing in and see how it’s doing on the sales side.

To determine that, you’re going to want to look at this topline revenue. There are a number of ways that you can look at it, but how I like to look at it is you want to see a topline revenue figure that’s somewhere in the range of 4.5% or greater, relative to its assets.”

In other words, the ratio shows how much revenue OCBC is able to glean as its asset base expands. This metric is shown in the table below for OCBC:

Table for OCBC's revenue-to-asset

Source: S&P Capital IQ

This would be one step where OCBC has fallen short by John’s standards. Over the past five years, the bank’s revenue as a percentage of assets has hovered around the 2% mark.

In all, John’s approach can be a quick way for investors to size up the banks in Singapore. These three steps helps us put into perspective the business value that OCBC offers. Not to be forgotten in this evaluation though, would be the share price we have to pay to receive the business value (in which we perceive) that OCBC offers.

With that, it is up to the Foolish investor to decide if OCBC deserves a place in their own portfolios.

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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.