Oversea-Chinese Banking Corp Limited (SGX: O39) is one of the three major banks based in Singapore. Over the last 12 months, OCBC’s stock price has gained 26% to S$13.18 currently. What may have caused this?
Reasons for a gain
There can be many reasons behind a stock’s price gain. But, the reasons can generally be classified as business-performance-related, or investor-sentiment-related.
The former deals with how a stock’s business has performed or is expected to perform. And in terms of business performance, one of the really important numbers would be the stock’s profits.
Meanwhile, the latter is about the overall mood of market participants – are investors more greedy than fearful, more pessimistic than optimistic et cetera? In general, negative emotions (fear and pessimism) tend to drag down the prices of stocks while positive emotions (greed and optimism) tend to push up stock prices.
The case with OCBC
In OCBC’s case, I believe both factors were at work.
Here’s a table showing a condensed income statement for OCBC for 2017:
Source: OCBC earnings update
We can see that the bank’s performance for 2017 was strong. Its net profit, in particular, was up by 19% year-on-year to S$4.15 billion. This growth would be a justification for the bank’s impressive stock price gain over the last 12 months.
But, I will also argue that investors’ sentiment has improved mainly due to economic growth, both in Singapore and elsewhere around the world. This, in turn, should lead to higher interest rates, which in turn, should benefit the banks including OCBC, since they can charge borrowers a higher interest rate.
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