For investors who follow these banks closely, you might have noticed that 2018 was one of the best years for the banks in terms of both revenue and underlying profitability. In fact, most achieved some kind of record in the last financial year.
But among the three, which bank is the most well-run? There are a lot of things to consider when attempting to answer that question, but we’re going to look at one important aspect investors should pay attention to: efficiency.
Most of the services provided by banks don’t differ much from bank to bank. In fact, the bulk of the banks’ income comes from interest. Given that profit is defined as revenue minus costs, a more efficient bank can generate higher profits for its shareholders.
There are many ways to evaluate a bank’s efficiency, and we’re going to look at one of those: the cost-to-income ratio.
For those new to the ratio, the cost-to-income ratio is calculated by dividing operating expenses by the operating income generated, i.e., net interest income plus the other income. The idea here is that the bank with a lower cost-to-income ratio is more efficient — generally thanks to better management.
With that, let’s look at the cost-to-income ratios of all three of these banks in 2018:
Sources: The banks’ full-year results
The cost-to-income ratios of the banks are not much different from each other, but OCBC appears to be the most efficiently-run local bank due to its lowest ratio among the trio.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned. The Motley Fool Singapore recommends DBS Group Holdings Ltd, Oversea-Chinese Banking Corporation Limited, and United Overseas Bank Ltd.