Singapore and Malaysia have a long history together – that’s no real surprise given their close geographical proximity. The former gained independence from British colonial rule in 1957. A few short years later in 1965, Singapore became an independent nation as well. For many Singaporeans, Malaysia is also a place where they work in and call home. The reverse is also true for many Malaysians. With such close links between the two nations, it may make sense for Singapore investors to start peering across the Straits of Johor in search of potential investing opportunities. It makes sense, since a look…
Singapore and Malaysia have a long history together – that’s no real surprise given their close geographical proximity. The former gained independence from British colonial rule in 1957. A few short years later in 1965, Singapore became an independent nation as well.
For many Singaporeans, Malaysia is also a place where they work in and call home. The reverse is also true for many Malaysians. With such close links between the two nations, it may make sense for Singapore investors to start peering across the Straits of Johor in search of potential investing opportunities.
It makes sense, since a look abroad widens the opportunity set for local investors. As an example, there are 771 listed securities on Singapore’s stock market as of November 2015. In contrast, Malaysia bourse operator Bursa Malaysia Berhad (KLSE:1818.KL) reported 1,739 listed counters at end-2014.
But just because there are more choices in Malaysia doesn’t necessarily mean they are better choices. With these in mind, let’s see how Singapore’s largest bank by total assets, DBS Group Holdings Ltd (SGX: D05), fares against its Malaysian counterpart, Malayan Banking Berhad (KLSE:1155.KL), from an investor’s vantage point.
There are a number of important financial metrics that tell us how well a bank’s business is doing, but in here, we’d be looking at three in particular, namely, the loan-to-deposit ratio, the efficiency ratio, and the growth in book value per share.
A bank’s basic business involves taking in deposits and loaning that money out to individuals and/or businesses. While deposits can be withdrawn at short notice by depositors, the same can’t be said for the loans that a bank makes (a bank can’t simply recall, say a 30-year housing loan, just like that).
If a large group of depositors start asking for their deposits back from a bank in a narrow span of time, the bank can suffer from liquidity issues. This is where the loan-to-deposit ratio comes into play.
It’s a measure of a bank’s liquidity – and it’s important to note that banks survive on liquidity. With a high loan-to-deposit ratio, there’s less margin of safety for a bank to meet withdrawals or sudden emergencies. Here’s how the math for the ratio looks like:
Loan-to-deposit ratio = Total Loans / Total Deposits
The table below illustrates how the loan-to-deposit ratios for DBS and Malayan Banking Berhad (Maybank) have changed over the past few years.
Source: Banks’ annual reports (click table for larger image)
The numbers show how DBS has been the slightly more conservative bank given its lower loan-to-deposit ratios.
The efficiency ratio measures a bank’s noninterest expenses as a percentage of its revenue. Mathematically, it’s given as:
Efficiency ratio = Noninterest Expenses / Net Revenue
It is an important ratio as it gives bank investors a conduit to observe the probability that a bank has to take on unnecessary and excessive risks in order to drive profit and growth. This is how Charles Calomiris, a Columbia Business School professor, describes the idea in his book Fragile by Design: The Political Origins of Banking Crises and Scarce Credit:
“Given an environment in which risk-taking with borrowed money was considered normal, it is easy to understand why some bankers, particularly those who were having trouble competing against more efficient rivals, decided that the right strategy was to throw caution to the wind [emphases mine].”
What you can see in the table below is how DBS and Maybank’s efficiency ratio have looked like over their past five fiscal years.
Source: S&P Capital IQ (click table for larger image)
With DBS’s average efficiency ratio of 43.7% over the period under study as compared to Maybank’s 48.4%, Singapore’s banking representative would come out tops here.
Growth in book value per share
A good proxy for the change in a bank’s underlying economic worth is the growth of its book value per share. The formula for the metric is simple:
Book value per share = (Total Assets – Total liabilities – Minority Interest) / Number of shares outstanding
The faster a bank can grow its book value, the speedier it is in creating value for shareholders. But, some caution is warranted for banks with growth rates that are way above-average. That’s because banks can grow by taking on more risks – but in so doing, shareholders are exposed to losses in the event that the bank blows up.
Source: S&P Capital IQ (click table for larger image)
On the basis of growth, Maybank outshines DBS. As the table above makes clear, Maybank’s book value per share has increased at a compound annual rate of 8.5% over the past few years and that’s faster than the 7.3% annual climb that DBS’s book value has shown.
A Fool’s take
We’ve looked at three important banking metrics and DBS has come out tops in two of them. It’s worth noting though that none of the above should be seen as the final word on the investing merits of the two bank stocks.
The figures we’ve studied here are useful, but banks are notoriously hard for investors to analyse and deeper research is required before any investing conclusion can be reached.
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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 writer Chong Ser Jing doesn't own shares in any company mentioned.