Are Singapore’s Banks Cheap Enough to Buy Now?

After the recent correction in the stock market, the share prices of the three major banks in Singapore – namely DBS Group Holdings Ltd (SGX: D05), Oversea-Chinese Banking Corp Limited (SGX: O39), and United Overseas Bank Ltd (SGX: U11) – have all declined significantly.

To that point, the trio have lost at least 12% each since 21 July 2015.

Here are the valuations of the three local banks in comparison with some of their regional peers:

Banks' valuation ratios table

Source: S&P Capital IQ

From the table above, we can see that DBS, OCBC, and UOB are generally trading at lower valuations than their peers. But, can the three banks be considered as real bargains?

The pros

DBS, OCBC, and UOB have very strong balance sheets. You can see this in their capital adequacy ratios (CARs), a measure of the cushion that a bank has to absorb losses.

Banks Total CAR table

Source: Banks’ earnings presentations for second-quarter of 2015

The Total CAR figures in the table are all well above the minimum requirement of 10.0% that’s been set by the Monetary Authority of Singapore. That’s a testament to the financial strength of the banks.

The cons

Singapore’s economic growth appears to be slowing (perhaps even shrinking), especially in the property and the oil & gas sectors. This might be an issue for the banks.

The two aforementioned sectors are some of the largest economic sectors in Singapore and if they’re not performing well, there’s a risk of the local banks seeing lesser loan activity in addition to higher instances of loans going bad.  If the hypothetical situations do eventually happen, the banks’ low valuations may not afford investors much protection.

Foolish Summary

DBS, OCBC and UOB may have great balance sheets and enticing valuations at the moment. But, with a weakening Singapore economy, their low valuations might just be a warning sign from the market about darker days to come.

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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 Stanley Lim does not own shares in any companies mentioned above.