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Better Bank Stock Now: Oversea-Chinese Banking Corp Limited or United Overseas Bank Ltd?

There are essentially three local banks in Singapore. Two of them are Oversea-Chinese Banking Corp Limited (SGX: O39) and United Overseas Bank Ltd (SGX: U11).

As some investors would say, a bank is a bank is a bank. But, can one of OCBC or UOB be the better bank stock? There are many things that an investor should be looking at in order to arrive at an answer. In here, let’s focus on just three aspects of the banks’ business fundamentals: The strength of their balance sheets, their track record of growth, and their valuation.

Strength of the balance sheet

Banks essentially depend on borrowed money to run. Meanwhile, the banking sector has also historically been cyclical. When leverage and cyclicality combine, risk is the result. It is thus crucial for investors to always keep an eye on a bank’s balance sheet – a weak balance sheet can result in disaster.

There are many (and I mean, many) ratios investors can look at to determine the strength of a bank’s balance sheet. But what I’m interested in here is the simple total assets to shareholders’ equity ratio. It tells us how much a bank is borrowing for each dollar of shareholders’ capital it has.

If a bank has S$200 million in assets and just S$10 million in equity, it will have a leverage ratio of 20. A 5% decline in the bank’s asset values will wipe out its equity. But, if the bank has the same amount of assets but S$20 million in equity, it has a leverage ratio of just 10. In this scenario, the bank’s assets has to fall by 10% before its equity goes to zero.

So, in general, the lower the total assets to shareholders’ equity ratio is for a bank, the less risk there is to it.

Based on their latest financials (as of 31 December 2016), OCBC and UOB have a total assets to shareholders’ equity ratio of 11.1 and 10.3, respectively.

Verdict: UOB wins

Track record of growth

The past is not a guarantee of the future, but it can still serve as a useful guideline when thinking about what to expect.

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 shows the growth in OCBC and UOB’s book value per share from 2011 to 2016:

Growth in book value per share for OCBC and UOB from 2011 to 2016
Source: S&P Global Market Intelligence

You can see from the chart that OCBC is the bank with the slightly faster growth in book value per share.

Verdict: OCBC wins

Valuation

With banks, the price-to-book (PB) ratio is a good valuation metric to use. At OCBC’s current stock price of S$9.71, it has a PB ratio of 1.14. UOB on the other hand, has a slightly higher PB ratio of 1.17 at its stock price of S$22.04 at the moment.

Verdict: OCBC wins

A Foolish conclusion

Based on the three aspects we looked at, OCBC is the slightly better bank stock. But it’s worth noting that there are other areas about a bank’s business to study before any investment conclusion can be reached. So, take what you see here about OCBC and UOB merely as useful starting points for further research.

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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 shares of United Overseas Bank. Motley Fool Singapore writer Chong Ser Jing owns shares in Oversea-Chinese Banking Corp.