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Singapore’s Bank Stocks Have Dipped Substantially. Are They Cheap Now?

The Straits Times Index (SGX: ^STI) has dipped by about 7% since the start of the year.

Much of that decline was caused by the underperformance of the three bank stocks that make up a large percentage of the index. At the moment, DBS Group Holdings Ltd (SGX: D05) and Oversea-Chinese Banking Corp. Limited (SGX: O39) are down 16.9% and 12.1% since the start of the year. Meanwhile, United Overseas Bank Ltd (SGX: U11) is down 9.7% from its peak for the year.

With the steep declines in stock prices, could now be a good entry point for long-term shareholders?

A Closer Look At DBS Group Holdings 

DBS Group, the largest bank in Singapore by market capitalisation, had a good start to the year. The bank’s first half net profit rose 23% to a record high, while return on equity was 12.5%, fairly close to its ultimate goal of 13%. Net income growth was driven by an increase in loan volume and a widening net interest margins. That said, CEO Piyush Gupta did warn of global uncertainties such as the effects of the trade war, currency crisis in Indonesia and India, China’s deleveraging, and the new housing property cooling measures in Singapore. On the other side, tailwinds such as higher interest rates and a robust US economy could boost near term earnings.

At the times of writing, DBS Group shares traded at around S$25.92. The table below shows the bank’s key valuation metrics.

Source: Author’s compilation of Data from Morningstar

Based on the DBS Group’s earnings and book value, shares are trading at a slight premium to its 5-year average but still sports a higher dividend yield than the STI.

A Closer Look At OCBC

Formed in 1932, through the merger of three local banks, Oversea-Chinese Banking Corp. Limited has grown to become one of the largest financial groups in South East Asia. It also has an insurance arm through the Singapore-listed subsidiary Great Eastern Holdings (SGX:G07). In the first half of 2018, total income was up 7.5%, earnings per share was up 23.4%, and book value per share increased 6.6%. Here’s a look at the key valuation metrics of OCBC’s shares right now.

Source: Author’s compilation of Data from Morningstar

OCBC’s shares now trade below its 5-year average earnings and its forward earnings multiple. It also has a price-to-book ratio consistent with its average. At these prices, shares of OCBC does look to have an attractive valuation.

A Closer Look At UOB

UOB is Singapore’s third largest bank by assets. Earnings in the first half of the year increased 24%, with net interest income and net fee income increasing 13% and 15% respectively. Customer deposits also increased 11% from a year ago, giving it ample funding for further loan volume growth should rates increase later in the year.

Source: Author’s compilation of Data from Morningstar

UOB currently spots a lower price-to-earnings ratio than its 5-year average and has a price-to-book ratio that is consistent with its average.

The Foolish bottom line

With the steep declines in prices, the three banks in Singapore now trade at much lower valuations. UOB and OCBC in particular trade below its historical price-to-earnings ratio. With the long-term track record and stability of the three major banks in Singapore, the banks look to be an attractive option for investors at current prices.

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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, Oversea-Chinese Banking Corp. Limited, and United Overseas Bank Ltd. Motley Fool Singapore contributor Jeremy Chia owns shares in DBS Group Holdings Ltd.