Checking Up on Singapore’s Bank Stocks: 4 Key Metrics Investors Should See

The earnings season in Singapore is winding down.

The big trio of Singapore’s banks, namely, DBS Group Holdings Ltd  (SGX: D05)Oversea-Chinese Banking Corp Limited (SGX: O39), and United Overseas Bank Ltd (SGX: U11), have all submitted their second-quarter earnings results in recent weeks.

It might be useful to have a recap in a single place to see how the trio fared.

A recent report by bourse operator Singapore Exchange Limited (SGX: S68) comes in handy here.

The report showed a potpourri of ratios and metrics for the banks based on their latest financials. I have selected four metrics that may be of interest to the Foolish investor: the price-to-book (PB) ratio, the return on equity (ROE), the non-performing loan ratio (NPL), and the loan-to-deposit ratio (LD).

Here are the metrics for the trio of DBS, OCBC, and UOB (data as of 8 August unless otherwise stated):

2016-08-18 Singapore Banks
Source: Singapore Exchange report

Let’s have a few words about the metrics.

The first metric, namely the PB ratio, is a commonly used valuation metric for financial institutions. In general, the lower the ratio is, the more ‘value’ there could be.

Next up is the ROE. The metric measures a bank’s ability to generate profits with its shareholders’ equity. As a rule of thumb – and in an opposite manner to the PB ratio – the higher the ROE is, the better it could be.

But, investors have to be aware that a ROE that’s too high may be a sign that a bank’s taking on too much financial risk. That’s because leverage (the use of borrowings) can help juice up a bank’s ROE.

Third, we have the NPL. This is a metric worth watching as banks earn their keep predominantly by making loans. And as banks are also highly-leveraged entities, their ability to write good loans would be important.

The NPL ratio measures how lenders perform when it comes to making good loans – it is the percentage of total loans that are considered as non-performing.

Finally, there is the LD. But why is this ratio noteworthy?

At the core, the business of banking is simple. It involves a bank taking in deposits and loaning out that capital to individuals or businesses. The loans that are made often can’t be recalled at short notice whereas depositors can ask for their deposits back in a relatively short amount of time.

If the mass majority of depositors start pulling money out from a bank within a narrow time frame, that’s when a bank may run into liquidity problems. With a high loan-to-deposit ratio, there’s less margin of safety for a bank to meet withdrawals or sudden emergencies.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended Singapore Exchange. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.