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Singapore Banks vs. US Banks: Which Are Cheaper Now?

Local investors will likely be familiar with the three major banks listed in Singapore: DBS Group Holdings Ltd (SGX: D05), United Overseas Bank Ltd (SGX: U11), or UOB, and Oversea-Chinese Banking Corp. Limited (SGX: O39), or OCBC.

How cheap are our local bank stocks compared to their peers in the US?

Are you overpaying?

The price-to-book ratio tells us how much we are paying for every dollar of equity on a company’s books. The ratio is especially useful for stocks that have largely tangible assets, which is the case for most banks.

The table below shows the price-to-book ratio of the big three banks in Singapore against a selection of three of the largest US-listed banks.

Source: Author’s compilation of data from Morningstar

The price-to-book ratios between the six banks are fairly close. Bank of America and Citigroup sport lower price-to-book ratios than the trio of Singapore banks. However, the price-to-book ratio comparison would not be complete without assessing how efficient the banks are in using its equity to generate a profit, which brings us to the next point.

The most efficient generators of profit?

The return on equity is calculated by dividing net income by shareholder equity. A company with a higher return on equity will naturally command a higher price-to-book ratio.

Source: Author’s compilation of data from Morningstar

JPMorgan Chase has the highest return on equity among all six banks. It has also historically surpassed analysts’ expectations, which could be the reason for its higher price-to-book ratio. In the quarter ended 30 June 2019, JP Morgan generated a return on equity of 16%, an improvement from last year. As the biggest bank in America, in terms of market cap, JPMorgan has a large war chest to invest in technology and customer acquisitions, which could help it maintain its market-leading return on equity.

DBS is the most second-most efficient bank on this list. The bank has been transforming itself digitally, focusing on its fee business and has also returned excess capital back to shareholders through higher dividends in the last couple of years. These initiatives have improved its return on equity to 12.1%, higher than the other two local banks.

How cheap are banks in relation to earnings?

Another useful valuation metric is the trailing price-to-earnings ratio. This ratio tells us how much we are paying for every dollar the bank earned over the last 12 months. The lower the ratio, the cheaper the stock is relative to its trailing earnings.

Source: Author’s compilation of data from Morningstar

Both sets of banks have exactly the same average price-to-earnings multiples. JPMorgan, with its relatively higher return on equity and historical track record of beating expectations, has understandably the highest price-to-earnings multiple among the six. 

In Singapore, DBS sports the highest price-to-earnings multiple. Investors may be willing to pay a higher price for the company due to its higher dividend payout policy and consistent growth in the past few years.

The Foolish conclusion

From the comparisons above, it seems that Singapore banks are reasonably priced when compared to this particular selection of US-listed banks. Based on the metrics use above, neither group seems cheaper than the other.

However, local investors may want to note that dividends from US-listed stocks are taxed at 30%, which will eat into your investment returns. Taking the tax into consideration and based on the similar valuations of both sets of banks, I would ultimately prefer putting my money in the local banks, where I can enjoy tax-free dividends.

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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore has recommended shares of DBS Group Holdings Ltd. Motley Fool Singapore contributor Jeremy Chia owns shares in DBS Group Holdings Ltd.