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Are The Banks Cheap Enough?

Being a financial hub, it is no surprise that Singapore is the home to three of the largest banks in the region. In fact, the banks are strongly represented on the Straits Times Index (SGX: ^STI). According to the SPDR STI ETF (SGX: ES3) sector breakdown, the banks actually takes up 35% in weighting in the Index.

So given that the three local banks have experienced about 15% decline in each of their share price since June this year, are the banks considered a bargain now for investors?

Valuation

DBS Group Holdings Ltd (SGX: D05), United Overseas Bank Ltd (SGX: U11) and Oversea-Chinese Banking Corp. Limited (SGX: O39) are three major banks in Singapore and all of them are represented in the Straits Times Index. In term of valuation, all three banks are trading at very similar level. That is not unexpected given their comparable businesses.

Although the valuations do not seem demanding at this moment, it is not far off its long term average since 2010. Thus in my opinion, the current valuation of the three major banks can be seen as reasonable.

  P/E (trailing) P/Tang. Book Dividend Yield (%)
DBS Group 10.3 1.3 3.4
UOB Ltd 10.4 1.2 4.5
OCBC Ltd 9.84 1.3 4.0

Source: S&P Capital IQ

Risk Ahead

Banks generate incomes from loans and services. With the talk of the economy slowing down across the region, that might impact the future interest income if less loan can be distributed out. Moreover, with the cooled property market and the slumping oil and gas sector, there might be risk of increase non-performing loans for the three lenders if some of their customers fall into financial difficulties.

Foolish Summary

Even though, the banks have seen a decline in their share price, that decline might be justified given the weaker outlook on the economy and the risk of additional bad loans coming from the property and oil & gas sector.

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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.