A Better Bank Stock: CIMB Group Holdings Bhd vs. Singapore’s Big Banking Trio

Singapore’s stock market does not offer much choice for investors when it comes to banks – there are only three banking stocks listed here, namely, DBS Group Holdings Ltd (SGX: D05), Oversea-Chinese Banking Corp Limited (SGX: O39), and United Overseas Bank Ltd (SGX: U11).

As such, it may make sense for Singapore investors to peer across the Causeway and take a look at Malaysia’s stock market. With nearly 1,800 companies there as opposed to the 771 stocks available in Singapore, a look into Malaysia, a country with close links to and plenty of shared history with Singapore, could help broaden the opportunity set for investors here.

With this in mind, how might CIMB Group Holdings Bhd (KLSE: 1023.KL), Malaysia’s second largest financial institution, stack up against Singapore’s banking trio from an investor’s point of view?

CIMB is certainly going up against tough competition. Singapore’s banks are strong, so much so that they were still solidly profitable even during the global financial crisis of 2007/09, a period when many Western banks collapsed with even more on the brink of getting wiped out.

There are a number of important financial metrics that tell us how strong a bank’s business is. But in here, let’s look at three in particular: the loan-to-deposit ratio; the efficiency ratio; and the growth in book value per share.

Loan-to-deposit ratio

The business of banking is simple when boiled down to the basics: A bank takes in deposits and loans that capital to individuals and/or organizations. But, this simple act of borrowing money (taking in deposits) and then loaning it out can result in liquidity issues if not handled prudently.

Deposits can be withdrawn at short notice. But loans that a bank has given out, which have maturities that range from a few months to a few decades (housing loans are a great example of the latter), can’t be recalled as quickly. This creates what’s called a duration mismatch.

If a large group of depositors start asking for their deposits back from a bank within a narrow span of time for whatever reason, the duration mismatch comes to the forefront, causing the bank to potentially suffer from liquidity issues.

The loan-to-deposit ratio gives investors an idea of how much liquidity a bank has. Mathematically, it’s given as such:

Loan-to-deposit ratio = Total loans / Total deposits

With a high loan-to-deposit ratio, a bank will have a lower margin of safety in its ability to meet large withdrawals or other emergencies. The table below illustrates how the loan-to-deposit ratios for DBS, OCBC, UOB, and CIMB have looked like over the last few years:

DBS, OCBC, UOB, CIMB - loan-to-deposit ratio
Source: Banks’ annual reports (click table for larger image)

CIMB, with its average loan-to-deposit ratio of 88% over the period under study, has lost out to the banking trio of DBS, OCBC, and UOB from Singapore.

Efficiency ratio

The efficiency ratio measures a bank’s non-interest expenses as a percentage of its revenue. Generally, the lower the ratio, the better it is. The math works as such:

Efficiency ratio = Non-interest Expenses / Net Revenue

This ratio is crucial because it is a good proxy for the amount of risk that a bank is, quite literally, forced to take on in order to generate a decent profit. Charles Calomiris, a professor at the Columbia Business School, explains in his book Fragile by Design:

“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].”

You can see how the efficiency ratios of the four banks we’re looking at have changed over their past five fiscal years:

DBS, OCBC, UOB, CIMB - Efficiency ratio
Source: S&P Capital IQ (click table for larger image)

In here, we can see that Singapore’s representatives, with their average efficiency ratios of less than 50%, have come out tops again against CIMB.

Growth in book value per share

A good rule of thumb for changes in a bank’s real economic worth is the growth in its book value per share. The math needed is shown below:

Book value per share = (Total Assets – Total Liabilities – Minority Interest) / Number of shares outstanding

Fast growth in a bank’s book value per share would indicate that it is adept at building value for shareholders. But, a bank with abnormally high growth rates would need to be approached with caution. That’s because the bank may be piling on risks and thus expose shareholders to potential losses should those risks blow up.

DBS, OCBC, UOB, CIMB - book value per share
Source: S&P Capital IQ (click table for larger image)

Growth is where CIMB manages to shine. From 2010 to 2014, Malaysia’s second-largest financial services provider has seen its book value grow by a healthy 10.1% per year. This compares very favourably against the growth rates of 8.1% or less that have been delivered by DBS, OCBC, and UOB.

A Fool’s take

In a final tally of the scores, we can see that DBS, OCBC, and UOB have collectively fared better than CIMB in two of the three categories. It’s worth noting though, that none of the above should be taken as the final word on the investing merits of the four bank stocks.

The numbers we’ve pored over are useful, but banks are notoriously complex businesses for investors to analyse and a deeper look is required before any investing decision 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.