The Three Numbers That Define Oversea-Chinese Banking Corporation

Singapore banks generate some of the highest Returns on Equity (RoE) in the market. Oversea-Chinese Banking Corporation (SGX: O39), which began life during the Great Depression, is no exception.

Singapore’s second-largest bank generated as much as $11.20 of bottom-line profit for every $100 of shareholder equity last year. That is on par with the median for the 30 companies that make up the Straits Times Index (SGX: ^STI).

The bank’s high RoE can be traced to its above-average Net Income Margin (NIM). It makes $48.10 of profit on every $100 of revenue it generates. Revenue in this case comprises of the interest it charges on loans less the interest it pays on deposits, plus the gains it makes on trading activities.

Its Asset Turnover, on the other hand, is lower than the market average. At 0.020, it is very low. But there is good reason for that. OCBC has lots of assets – some $404b. The bulk of the assets are made up of loans.

OCBC also makes use of leverage, which is not surprising. It is, after all, a bank, so a Leverage Ratio of 11.7 is not altogether uncommon.

Thing is, every dollar that is deposited at the bank is considered as a liability. That’s because every dollar that is put into a savings or current account is treated as a loan to the bank. We are lending money to the bank, on which we hope to earn some interest. Right now we don’t earn a great deal, but one day we might.

By dismantling the Return on Equity for OCBC, it is easy to see why the bank is solid. Its RoE of 11.2% is the product of a mouth-watering Net Income Margin of 48.1%; a low Asset Turnover of 0.02 and a hefty dose of Leverage of 11.7.

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