Would Warren Buffett Buy United Overseas Bank?

Warren Buffett knows a thing or two about banks. It is reckoned that at one stage last year, four of the top the 11 holdings in his Berkshire Hathaway investment vehicle were banks.

So what would Buffett make of United Overseas Bank (SGX: U11).

Buffett abhors high earnings volatility. He likes to be able to predict with some certainty the profits that a company is likely to make. Banks, being cyclical business, rarely have predictable earnings. But UOB could be an exception.

Over the last ten years, UOB has delivered an average bottom-line profit of around S$2.3b with a standard deviation of S$500m. Last year, profits came in at S$3.2b. That is an 8% improvement from the previous year, which is roughly the rate at which profits have historically grown at the bank.

UOB is a reasonably high margin business. What’s more the margins are consistently high, which is reflection of the steady spread between the interest it pays on deposits and interest it charges on loans. What’s more, its provision for non-performing loans is modest.

On most measures UOB fares well. It pays a decent dividend, which is adequately covered. Currently, the shares yield a respectable 3.2%. Its loan book has also been increasing steadily over time. But the shares are not cheap. It is currently valued at over 11 times earnings and 40% above its book value.

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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.