If you had invested in United Overseas Bank Ltd (SGX: U11) – one of the big banks in Singapore – since the beginning of 1992, you would be sitting on a total return today (with reinvested dividends accounted for) of around 970%. That works out to an annualised return of 10%, which is a good return by any measure. But, if you had invested in Public Bank Berhad (KLSE:1295.KL) – one of the few non-government-linked banks listed on Bursa Malaysia, the stock exchange of Malaysia – over the same period, you would be sitting on a total return (again, with reinvested dividends) of around…
If you had invested in United Overseas Bank Ltd (SGX: U11) – one of the big banks in Singapore – since the beginning of 1992, you would be sitting on a total return today (with reinvested dividends accounted for) of around 970%.
That works out to an annualised return of 10%, which is a good return by any measure.
But, if you had invested in Public Bank Berhad (KLSE:1295.KL) – one of the few non-government-linked banks listed on Bursa Malaysia, the stock exchange of Malaysia – over the same period, you would be sitting on a total return (again, with reinvested dividends) of around 6,300%.
That’s a 19% compound annual return over the past 24 years. Even after adjusting for the depreciation of the ringgit against the Singapore dollar in that period, Public Bank’s annualised gains would still be spectacular in the teens range.
But that is then and this now. How do the two banks’ current business fundamentals compare? Which is the better bank stock? Let’s take a look.
Both financial institutions were founded by Chinese businessmen who have continued to be major shareholders.
In Public Bank’s case, its founder is Tan Sri Dato’ Dr. Teh Hong Piow, who is still running the bank and is a major shareholder with an ownership stake of around 24%. Coming to UOB, it was founded by Datuk Wee Kheng Chiang. The bank’s still run by the descendants of Datuk Wee and a big chunk of its shares are owned by the Wee family.
In terms of geography, Singapore is UOB’s most important market as it accounted for 61% of the bank’s total pre-tax profit in 2015, according to data from S&P Global Market Intelligence. The same data source show that 91% of Public Bank’s total assets at end-2015 come from Malaysia.
So as you can see, there are some important differences in the two banks’ market exposure, with Public Bank seemingly the one with the higher concentration risk.
UOB has seen its revenue grow by 13% annually from just S$450 million in 1992 to S$7.4 billion in 2015. The bank’s net income also managed to increase from S$301 million to S$3.2 billion over the same period, representing an annualised growth rate of 11%.
Public Bank’s business growth had also been stellar. In fact, it’s even stronger than UOB’s. The Malaysian bank’s revenue had jumped by an annual rate of 13.4% from RM515 million in 1992 to RM9.3 billion in 2015. Meanwhile, its net income had shot up by a mouthwatering 18% per year in the same timeframe from just RM116 million to RM5.06 billion.
Public Bank seems to be a much more profitable bank when compared to UOB. The Malaysia-based bank had generated an average return on assets (ROA) and average return on equity (ROE) of 1.4% and 23%, respectively, since 2006. UOB on the other hand, only managed to turn in an average ROA of 1.2% and average ROE of 13% for the same period.
Due to its great track record, it shouldn’t be surprising to know that Public Bank has high valuations. Currently, the Malaysia-based bank trades at 14 times trailing earnings and 2.5 times its tangible book value. Meanwhile, UOB is only valued at 10 times its earnings and 1.2 times its tangible book value at the moment.
A Foolish summary
Summing it up, we can see that UOB is the bank with higher diversification and a cheaper valuation. Public Bank on the other hand, has stronger profitability and a much better long-term track record.
While what I’ve shared can be a useful starting point for deeper research, they should not be taken as the final word on the investing merits of the two banks. In any case, which of the two banks do you think would be a better investment for the future? You can share your thoughts in the comments section below!
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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 Stanley Lim doesn’t own shares in any companies mentioned.