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How Did The Singapore-Listed Banks Perform In 2017?

The trio of banks in Singapore – DBS Group Holdings Ltd (SGX: D05), Oversea-Chinese Banking Corporation Limited (SGX: O39) and United Overseas Bank Ltd (SGX: U11) – make up slightly more than 40% of the Straits Times Index (SGX: ^STI). With such high contributions to Singapore’s stock market benchmark, the banks draw a huge interest from the investing public.

With the three financial giants all having reported their 2017 full year earnings recently, I thought it would be interesting to do a comparison of their latest financial performance to determine which is the best performer.

Key ratios on profitability

The table below shows a few key ratios that give us a picture of the banks’ profitability:

Source: Banks’ 2017 financial statements (the “best” metrics are in bold)

Net interest margin (NIM): Similar to the operating margin for an industrial company. The NIM shows the average interest margin that a bank is earning from its borrowing and lending activities. Among the three banks, UOB had the highest NIM for 2017.

Cost-to-income ratio: This ratio measures the non-interest expense of a bank as a percentage of its revenue. It is to gauge the efficiency and productivity of banks. Generally, the lower the ratio is, the more efficient a bank is. Among the three banks, OCBC had the lowest cost-to-income ratio in 2017.

Return on assets and return on equity: These tell us how effective a bank’s management is in maximising the profits earned on shareholders’ capital. Among the three banks, OCBC had the highest return on assets and return on equity for 2017.

Key ratios on the strength of the balance sheet

Here is a table showing the key ratios that can give us clues on how strong the banks’ balance sheets are:Source: Banks’ 2017 financial statements (the “best” metrics are in bold)

Loan-to-deposit ratio: This ratio measures a bank’s liquidity. The sweet spot for this ratio is usually between 80% and 90%. Banks that have a loan-to-deposit ratio below that range may not be maximising the capital they have. On the other hand, if a bank’s loan-to-deposit ratio is above the range, it might run into liquidity problems when there is a high withdrawal rate on deposits, especially during an economic downturn. Among the three banks, DBS was the best in 2017 at maximising the loans and deposits it had, given that it had the highest loan-to-deposit ratio in the year.

Non-performing loans ratio: A non-performing loan is a loan on which the borrower is unable to pay off interest or the principal amount. The lower the ratio, the better it is for a bank. Among Singapore’s three banks, OCBC had the lowest non-performing loans ratio for 2017.

Leverage ratio and liquidity coverage ratio: These ratios show the ability of a bank to meet its financial obligations. In general, the lower the leverage ratio, the better. Meanwhile, for the liquidity coverage ratio, we’re looking for high numbers. Among the three banks, OCBC had the best leverage and liquidity coverage ratios in 2017.

Key ratios on valuation

The following table spells out the banking trio’s important valuation numbers:Source: Banks’ 2017 financial statements; price as at the close of 27 February 2018

OCBC seems to offer the best value among the three banks with its average PB ratio and a PE ratio that is the lowest.

If we include the special dividend of 50 cents per share declared for DBS, its adjusted dividend yield would be slightly below 5%. From 2018 onwards, DBS is set to pay 120 cents per share in yearly dividends, as compared to 2017’s interim and final dividend of 93 cents per share. UOB’s board has also declared a special dividend to the tune of 20 cents per share. 3.5% would be the bank’s adjusted dividend yield.

A Foolish Conclusion

Banks work differently as compared to companies that provide services or manufacture goods. An asset in a bank’s balance sheet is a liability in a manufacturing company’s balance sheet. Using the key financial ratios presented above would be helpful for investors who are looking to invest in banking stocks.

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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 DBS Group Holdings Ltd and United Overseas Bank Ltd. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.