Sunday, September 28, 2008

Brief overview of local banks

Is it time to buy local banks now? Someone wanted to invest a substantial amount of money into OCBC, so I thought I would do a little research to see whether it makes sense. I do not really know how to valuate banks and will not attempt to do so here. Rather, I'll just dig into the past number and let the reader do the rest of the legwork, if they are interested.

My source for these information comes from Shares Investment book (340 issue) and the respective banks' website.

Here is the brief overview of their segmented business data. It shows the revenue incurred from various segments as a percentage of the FY07's revenue.


We can see that OCBC derived a substantial portion of their revenue from dividend and rental. I suppose that rental means they have, under their holdings, certain properties. DBS has more percentage in terms of interest income and fees/commission. UOB is quite similar to DBS in that aspect, though I'm curious to know what constitutes the 'others'.

Below shows the ratios that I've done for the three local banks from FY03 to FY07. Do pay attention to the * portion below each table, as I noted the assumptions I made when calculating the figures.


Based on annualised 1H08 earnings for the three banks, at current closing of OCBC @ 7.160, DBS @ 16.920 and UOB @ 16.800, the forward PE for FY08 (estimated) and Price/Book are:

Banks-----------PE------------P/B
OCBC ----------10.7-----------1.6
DBS ------------10.2-----------1.3
UOB ----------- 11.2-----------1.6

I've browsed through the Singapore Country Book prepared by Deutsche Bank around May 2008. They mentioned that OCBC and DBS are well positioned to benefit from double digit loan growth and a rising net interest margin environment. The report seems quite bullish about the loan growth, saying that it is expected to be the second strongest year after Asian crisis. I've nothing much to comment about this, since I'm not in the know. They did cite factors such as strongth growth in business lending (particularly building and construction, property area) and in housing loans (particularly the mass to mid-market private residential, and HDB) as catalyst to push up the loans growth in the local banks.

This is for future reference:

OCBC


DBS


UOB


So which provides the most value? Price is often illusory, because the cheapest in price need not be the cheapest in value. Need to do more research.

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