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The Best Bank Stock in Singapore

Two weeks ago, I wrote an article about two important metrics to look at when analyzing bank stocks. The metrics in question are the net interest margin (NIM) and loan-to-deposit ratio (LDR).

In here, I’m going to pit Singapore’s three local banks – DBS Group Holdings Ltd (SGX: D05), Oversea-Chinese Banking Corp Limited (SGX: O39), and United Overseas Bank Ltd (SGX: U11) – against each other using the two metrics to see which emerges as the best.

For convenience and as a refresher, here’s a short recap of the NIM and LDR:

  • NIM – The difference between the interest rates a bank charges its customers for loans and the interest rates it pays to depositors and other lenders. A higher NIM equates to a wider spread between the two interest rates and in general, that’s a good thing.
  • LDR – The percentage of a bank’s deposits that the bank is lending out. It is a gauge of the liquidity risks a bank is bearing; a higher ratio is a sign that more of a bank’s deposits are being lent out, meaning the bank has less room for error to meet large emergency withdrawals by depositors.

With that, let’s start the competition.

DBS has seen its NIM grow from 1.62% in 2013 to 1.77% in 2015. This in turn has helped the bank to increase its net interest income (one component of a bank’s revenue) from S$5.57 billion to S$7.10 billion over the same period. This is a 27% increase over two years.

As for the LDR, the metric has climbed from 85.0% in 2013 to 88.5% in 2015, representing a slight increase in the liquidity risk that DBS is facing.

OCBC’s NIM has increased marginally from 1.64% in 2013 to 1.67% in 2015. But while the bank’s NIM only expanded slightly, its net interest income had increased by 34% from S$3.88 billion in 2013 to S$5.19 billion in 2015. The increase can be attributed mainly to the expansion in the bank’s deposits and loan portfolio. From 2013 to 2015, deposits from non-bank customers increased from S$196 billion to S$246 billion while loans increased from S$168 billion to S$208 billion.

Moving on to the LDR for OCBC, the metric has inched down from 85.7% in 2013 to 84.5% in 2015, implying a decline in the bank’s liquidity risks.

Lastly, we have UOB. The bank’s NIM increased from 1.72% in 2013 to 1.77% in 2015. This helped push an expansion of UOB’s net interest income from S$4.12 billion to S$4.93 billion in that same timeframe.

Coming to the LDR, the metric for UOB has decreased from 88.5% in 2013 to 84.7% in 2015. So, in a similar manner to OCBC, UOB’s liquidity-related risks have been lowered slightly over the past two years.

A Fool’s take

It is interesting to note how OCBC has grown its revenue in a contrasting manner to the other two banks. Although OCBC didn’t see a significant expansion in its NIM, its net interest income revenue-component grew by a staggering 34% from 2013 to 2015 largely due to a 24% increase in loans. In comparison, DBS and UOB saw their loan portfolios grow by ‘only’ 13.9% and 13.8%, respectively, over the same period.

To sum up the three banks’ ring fight based on the two metrics, it seems we have an ultimate winner in UOB. The bank saw both its NIM and LDR improve, with the former increasing and the latter declining.

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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 Esjay owns shares in DBS Group Holdings, Oversea-Chinese Banking Corporation, and United Overseas Bank.