Institutional investors – essentially big money managers – have been selling Oversea-Chinese Banking Corp Limited‘s (SGX: O39) shares recently. In September 2018, OCBC, one of Singapore’s banking giants, was among the top 10 shares that saw the highest net sales in dollar value by institutional investors during the month.
The institutional selling statistic may induce some fear toward OCBC among retail investors. After all, institutional investors tend to possess vastly greater resources than individual investors like you and me when researching stocks. But, there are good reasons why we should not be concerned with OCBC despite the recent sales of the bank’s shares by institutional investors.
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In a previous article, I shared two reasons:
1. The bank’s most recent quarterly earnings update was strong
2. The bank has a solid long-term track record of growth
In this article, I want to share two more reasons why investors should not panic over OCBC despite the sales of the bank’s shares by institutional investors.
Conservative capital adequacy ratios
Capital requirement (also known as capital adequacy) is the amount of capital a bank has to hold as required by its regulator. Capital requirements are set to ensure that banks will not become insolvent during difficult economic conditions.
For investors, capital adequacy ratios are a good indicator of whether a bank is operating in a conservative manner. In general, the higher the capital adequacy ratios, the more conservative a bank is in conducting its business.
I think OCBC has conservative capital adequacy ratios. As of 30 June 2018, its Common Equity Tier 1 capital adequacy ratio (CAR), Tier 1 CAR and Total CAR were 13.2%, 14.3% and 15.9% respectively. These ratios were well above the regulatory requirements of 6.5%, 8% and 10%.
A reasonable valuation
OCBC’s share price has fallen by 24% from a 52-week high of S$14.04 to S$10.61 right now. At its current share price, OCBC has a price-to-book (PB) ratio, price-to-earnings (PE) ratio, and dividend yield of 1.1, 9.8, and 3.7%, respectively.
Comparatively, the market’s PB ratio, PE ratio, and dividend yield are at 1.1 times, 10.7 times and 3.6%. I am using the SPDR STI ETF (SGX: ES3) as a proxy for the market; the SPDR STI ETF is an exchange-traded fund (ETF) that tracks the fundamentals of Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI).
It’s clear that OCBC’s current valuation is slightly better than the market’s, given its lower PE ratio and higher dividend yield.
The Foolish conclusion
Market sentiment toward OCBC is clearly negative at the moment, given the recent sales of the bank’s shares by institutional investors. But, individual investors like you and me should not panic, since OCBC has (1) a good track record of long-term business growth, (2) delivered a strong financial performance in its most recent quarterly earnings update, (3) conservative capital adequacy ratios, and (4) a reasonable valuation.
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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 contributor Lawrence Nga doesn’t own shares in any companies mentioned. The Motley Fool Singapore has a recommendation for Oversea-Chinese Banking Corp Limited.