The Better Bank Stock Now: DBS Group Holdings Ltd vs. United Overseas Bank Ltd

The stock market hasn’t been kind to banks lately. Over the past 12 months, shares of the three Singapore banks – DBS Group Holdings Ltd (SGX: D05), Oversea-Chinese Banking Corp Limited (SGX: O39), and United Overseas Bank Ltd (SGX: U11) – have fallen by at least 15.9%.

OCBC is the ‘luckiest’ of the trio as it is the bank with the 15.9% stock price decline. DBS and UOB are relatively worse off, with their shares down by 24.4% and 18.3%, respectively. Given that the latter two banks are the ones with the stiffer drops, the individual investor might ask: Would DBS or UOB be the better bank stock now?

There are many things that an investor should be looking at in order to arrive at an answer to the question above. But in here, let’s just focus on three key aspects of the two banks’ business fundamentals: The strength of their balance sheets, their track record of growth, and their valuation.

Strength of the balance sheet

Banks are leveraged entities – meaning to say, they essentially depend on borrowed money to run their business. The banking sector is also cyclical. When leverage and cyclicality are mixed, risk is the result. That’s why it is important for investors to always keep an eye on a bank’s balance sheet – a weak balance sheet can be a recipe for disaster.

There are two ratios I’m interested in here and that is, the assets-to-equity ratio and the loan-to-deposit ratio.

The first ratio tells us how much a bank is borrowing for each dollar of shareholder’s capital that it has. If a bank has S$200 million in assets but just S$10 million (S$20 million) in equity, it will have a leverage ratio of 20 (10). In this case, the bank’s equity will be wiped out if its assets fall by just 5% (10%) in value. So, in general, the lower the asset-to-equity ratio, the less financial risks a bank is taking on.

The next ratio – the loan-to-deposit ratio – is an indication of liquidity risks in a bank’s balance sheet. Liquidity risks stem from the basic business model of a bank: Borrowing money (mainly by taking in deposits) and lending that capital out. Here’s how professors Charles Calomiris and Stephen Haber describe banks’ liquidity risks in their book Fragile By Design: The Political Origins of Banking Crises and Scarce Credit:

“[It] is extraordinarily difficult, if not impossible, for bankers to exactly match the durations of their contracts with depositors and debtors. Bank deposits can typically be withdrawn on very short notice, but the loans financed by those deposits may extend for months, years, or even decades.

In fact, bankers face the risk that, even if their banks are not insolvent, worried depositors might show up en masse to withdraw their money, and there might not be enough cash in the till to satisfy all those withdrawal demands.”

Having a higher loan-to-deposit ratio would mean that a bank has smaller room for error to meet large short-term demands for deposit-withdrawals or emergency cash needs.

Here’s how DBS and UOB’s asset-to-equity and loan-to-deposit ratios stack up:

DBS, UOB balance sheet table
Source: Banks’ earnings report

We can see that UOB is the bank with the stronger balance sheet as it has the lower asset-to-equity and loan-to-deposit ratios.

Track record of growth

A bank’s achievements in the past may not be a perfect indicator of how the future will play out, but it can still serve as a guideline when thinking about how its business will perform in the years ahead.

The metric I want to look at in here is the book value per share. Given that banks are financial institutions, the change in their book values per share over time can be a good proxy for the change in their real economic worth. The chart below illustrates the growth in DBS and UOB’s book value per share over the past five years from 2010 to 2015:

Growth in book value per share for DBS and UOB from 2010 to 2015
Source: Banks’ earnings report (click chart for larger image)

UOB turns out to be the bank with the slightly stronger track record of growth. Its book value per share had grown by a total of 43% in the timeframe under study, whereas DBS had clocked in total growth of 41%.


Even the best business can be a lousy investment if bought at too high a price. That is why valuation is so important when it comes to investing.

As I’ve mentioned, the book value per share of a bank is an important metric to look at. So, it may come as no surprise that the simple price-to-book (PB) ratio can be a useful valuation measure for banks. Here’s how the valuations of DBS and UOB look like:

DBS, UOB valuation table (2)
Source: Banks’ earnings report

DBS is the cheaper bank stock here. Its PB ratio of 0.98 is a shade lower than UOB’s selfsame figure of 1.07.

A Fool’s take

In summary, UOB appears to be the stronger bank stock by virtue of its higher growth rate and healthier balance sheet.

But it’s worth bringing up an important reminder: Although all that we’ve seen about DBS and UOB in here may be important, they should not be taken as the final word on the investing merits of the two banks. As I’ve mentioned earlier, there are other important aspects of the banks’ business to study 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 companies mentioned.