Making Sense of Hong Leong Finance Ltd from an Investor’s Perspective

DBS Group Holdings Ltd (SGX: D05), United Overseas Bank Ltd (SGX: U11), and Oversea-Chinese Banking Corp Limited (SGX: O39) are big and well-known lenders in Singapore.

But, there are actually other public-listed lenders in our Garden City that are less well-known. Some include Hong Leong Finance Ltd (SGX: S41) and Singapura Finance Ltd (SGX: S23).

In here, I’d be taking a closer look at Hong Leong Finance’s business based on two important metrics: The loan to deposit ratio (LDR), and the price-to-book (PB) ratio. I’d also touch on an important difference between Hong Leong Finance’s business model with that of the three big banks.

Let’s deal with the LDR first.

As of 31 March 2016, Hong Leong Finance has S$9.93 billion in loans and S$11.1 billion in deposits. This implies a LDR of 89.5. For perspective, DBS – Singapore’s largest bank by assets – has a LDR of 87.4 (S$274 billion in loans and S$314 billion in customer deposits).

There are two takeaways when looking at these numbers. First, Hong Leong Finance is nearly 30 times smaller than DBS in terms of deposits, and second, Hong Leong may be taking on more liquidity risk.

Let’s move on to the PB ratio now.

Hong Leong Finance has a book value of S$3.84 per share. At its current price of S$2.25, it has a PB ratio of just 0.59. This is much lower when compared to DBS’s PB ratio of 0.96.

Lastly, it is important to note that the majority of Hong Leong Finance’s total income (its revenue) is derived from interest income. Fee and commission income usually makes up less than 10% of total income. This means that Hong Leong Finance is heavily dependent upon its lending business, and thus its net interest margin (the spread between the interest it charges on its loans and the interest it pays its lenders), to deliver strong earnings.

This is in stark contrast to the big banks such as DBS, OCBC, and UOB, which have a wider product portfolio from which they can generate revenue. This lessens concentration risks for the big banks.

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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 Corp, and United Overseas Bank.