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An Investor’s Guide To Understanding The Cost Structure Of Oversea Chinese Banking Corp Limited

Oversea-Chinese Banking Corp Limited (SGX: O39) is Singapore’s second largest bank by assets. It is also the longest established bank in the Garden City and currently has operations in 18 countries and regions.

My fellow Fool Esjay had recently written an article detailing the bank’s different revenue sources.

One way for a company to build value for shareholders is to grow its profits steadily over time. As such, it is important that we understand both variables that can impact a company’s profit – its revenue and costs.

I thus thought that it would be useful to follow up with an article on the cost structure of OCBC.

Here’s a table showing the bank’s operating expenses in 2015:

ocbc-operating-expenses-table
Source: OCBC’s 2015 annual report

There are a few points we can note here.

First, the bank’s operating expenses exclude interest expenses and allowances and impairment of bad debts on lending activities. If included, interest expenses would represent the biggest expense for OCBC at S$3.3 billion in 2015. Allowances and impairment, on the other hand, totalled S$488 million in 2015.

Second, we can see that staff costs account for the majority of OCBC’s operating expenses at 61.5% (S$2.254 billion divided by S$3.664 billion). A tangential piece of information to note that’s not shown in the table above is that OCBC’s staff costs had grown by 13% in 2015, higher than the 8% increase in the bank’s staff strength – this could be an indication of salary inflation.

Third, a significant majority of OCBC’s operating expenses are fixed in nature. These costs include staff costs, depreciation, maintenance and hire of property, plant & equipment, and rental expenses. These costs make up 75% of OCBC’s total operating expenses.

Given the high proportion of fixed costs in the bank’s cost structure, it is important that OCBC has scale in its business in order to keep its fixed costs per unit of banking service provided low.

By breaking down the expenditure of OCBC, investors can better understand the bank and thus make more-informed investing decisions. Investors could also look at trends in the bank’s cost structure and/or compare OCBC with its peers.

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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 Lawrence Nga doesn’t own shares in any companies mentioned.