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DBS Group Holdings Ltd vs United Overseas Bank Ltd: Which is the Better Buy? Part I

Local banks performed exceptionally well over the past 12 months. A buoyant local home market, robust regional economic growth, rising interest rates and the rebound of the oil and gas sector have all been catalysts to the improved overall performances of local banks.

Unsurprisingly, bank stocks have likewise risen considerably over the past year. With investor sentiment on banks gaining traction, I thought now is the perfect time to compare two prominent banks in Singapore to determine which, at current prices, is the better buy.

The two banks in the spotlight are DBS Group Holdings Ltd (SGX: D05) and United Overseas Bank Ltd (SGX: U11). To determine which of these two banks make the better investment, I will compare financial aspects of the banks, as well as, current stock valuations. With that, let’s begin.

Introducing the contenders

DBS is the largest bank in Singapore with a market capitalisation of around S$73 billion. The company operates approximately 280 branches across 18 geographical markets. Beside its network of outlets in its core markets of Singapore and Hong Kong, the group has also expanded into developing markets such as India and Indonesia, through a digital platform. In 2017, DBS celebrated 50 years in operation.

United Overseas Bank’s history dates back to 1935, when businessman Wee Kheng Chiang, founded the company. The group has since grown its network to more than 500 offices and branches across 19 countries. With a market capitalisation of close to S$47 billion, UOB is the third largest listed bank in Singapore.

Historical earnings growth

The first comparison I wish to make is the historical earnings growth.

Over the last five years, DBS has grown its revenue to S$10.4 billion in 2017 from S$8.4 billion in 2013. That translates to a compounded annual growth rate of 4.36%. Net income for the bank grew at a CAGR of 3.55% to S$4.37 billion in 2017, from S$3.67 billion in 2013. Diluted earnings per share (EPS), likewise, grew from S$1.066 to S$1.216, a CAGR of 2.67%.

During the same time frame, United Overseas Bank expanded its revenue by a CAGR of 5.24% to S$8.12 billion in 2017, from S$6.29 billion in 2013. Net income grew at a CAGR of 2.47% from S$3 billion to S$3.39 billion, while earnings per share rose 2.31% annually from S$1.407 to S$1.577.

From the above comparison, we can see that both banks have grown their sales and profitability over the years.

DBS grew its earnings per share at a slightly faster rate of 2.67% per year, but United Overseas Bank’s revenue grew at a much faster pace than DBS. Both delivered solid growth and excelled in different areas.

Fee and commission income growth

To get a better picture on earnings growth momentum going forward, I will take a look specifically at how the two banks are growing their fee income.

As a quick introduction on this topic, banks typically earn their income from two sources. The first source is through interest income from loans. The second source is income earned through means other than interest income, broadly categorised as non-interest income. The fee and commission income is one segment of that, which comprises of wealth management, credit card business, investment banks and transaction services. This segment is typically a lower-capital, higher profitability business than interest income. The bank that can grow this particular segment will therefore more likely show greater profitability and stability in the future.

Over the past five years, DBS has grown its fee and commission income from S$1.88 billion in 2016 to S$3 billion in 2017. That translates to an impressive compounded annual growth of 9.8% per annum. United Overseas Bank managed to grow this segment at a CAGR of 4.54% to S$2.16 billion from S$1.73 billion in 2013.

Both banks have shown solid growth, in this regard. But with a CAGR of 9.8%, DBS did better than its peer.

Balance sheet resilience

Finally, the balance sheet will provide clues on whether the bank has enough liquidity to cover any short-term shocks.

A common metric used to determine the capital position of a bank is the common equity tier 1 capital adequacy ratio (CET1 CAR). This measures the amount of equity capital the bank has as a percentage of its risk-weighted assets. Banks in Singapore are required to maintain a CET1 CAR of 6.5% or more. As of 31 December 2017, DBS and UOB had a CET1 CAR of 14.3 and 16.2%. In this respect, both banks have adequate equity capital.

It is also worth noting that both DBS and United Overseas Bank also have considerably safe leverage ratios of 7.6% and 8%.

From what I have seen on their balance sheet, both banks have managed their finances prudently.

The Foolish bottom line

From the comparisons above, we can see that both banks have performed commendably over the past five years, growing both in terms of revenue and profitability. Furthermore, both banks have very manageable leverage ratios and robust balance sheets.

However, DBS has shown that over the past five years, not only has it grown its overall EPS at a slightly faster rate than United Overseas Bank, its fee and commission segment have also compounded at a much faster rate. Consequently, in terms of business growth and profitability, I will have to say the DBS is marginally ahead of its counterpart.

In the next article, I will take a look at current valuations of both the stocks to determine which stock at current prices will provide greater value for investors.

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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 a recommendation on DBS Group Holdings Ltd and United Overseas Bank Ltd. Motley Fool Singapore contributor Jeremy Chia owns shares in DBS Group Holdings Ltd.