Are Our Local Banks Still Attractive Now? How Did DBS, UOB, and OCBC Fair In 2020?

With 2020 being a very shaky year for the economy, banks are definitely the hardest hit, with loans defaulting and interest rates hitting near 0%. With our 3 local banks, DBS (SGX: D05), UOB (SGX: U11), and OCBC (SGX: O39) just released their FY2020 results, investors are wondering whether or not they should sell, hold or buy more of these local bank stocks. In this article, I’ll cover how well the 3 local banks did as well as whether or not they are still attractive at their current valuation.

Operating Performance

Year on Year DifferenceRevenueProfit Before AllowancesAllowances MadeNet Profit
DBSS$14.59 billion (+0.3%)S$8.434 billion (+2%)S$3.066 billion (+336%)S$4.721 billion (-26%)
UOBS$9.176 billion (-9%)S$5.09 billion (-9%)S$1.554 billion (+257%)S$2.915 billion (-33%)
OCBCS$10.139 billion (-7%)S$6,312 billion (-7%)S$2.043 billion (+129%)S$3.586 billion (-26%)

Jumping right into the operating performance, we can see that DBS was the only bank that managed to increase its revenue year over year while OCBC fell by 7% and UOB fell the most by 9%. Looking at the profits before allowance, DBS is leading by a larger margin, increasing by 2% year over year while OCBC and UOB fell by 7% and 9% respectively.

Read Also: DBS v UOB v OCBC! Which Bank Performed The Best In 1H2020

Now, revenue is definitely important but with 2020 being such a shaky year, our 3 local banks had to make a ton of allowances to account for possible bad debts. Looking at the table, we can see that DBS made the largest amount of allowances, a whopping S$3.066 billion, representing a 336% growth from last year. UOB also made a relatively large jump in allowances to S$1.554 billion, representing a 257% growth from last year. OCBC lagged behind in terms of growth at 129%, with its allowances coming up to S$2.043 billion. In terms of size, DBS is definitely the most conservative one followed by OCBC and then UOB.

Looking at net profits, we can see that DBS and OCBC came up to a tie, falling 26% from the year prior while UOB fell the most at 33%. From this, we can confidently say that DBS performed the best with its revenue and profit before allowances improving from the year prior, together with the fact that they had the largest allowances made across the 3 local banks.

Key Financial Ratios

As at 31st December 2020Net Interest MarginCost/Income RatioNon-Performing Loans RatioLiquidity Coverage Ratios (LCR)Leverage RatioCommon Equity Tier 1
DBS1.62%42.2%1.6%136%6.8%13.9%
UOB1.57%45.6%1.6%135%7.4%14.7%
OCBC1.61%43.8%1.5%139%7.7%15.2%

Moving onto key financial ratios, and this is definitely the most important part when analyzing and evaluating a bank. At first glance, DBS seems to be beating its peers with a higher NIM and lower cost/income ratio. The LCR and NPL ratio seems to be around the same across the 3 local banks.

Unfortunately, DBS does lag behind its peers when it comes to the leverage ratio as well as CET-1 ratio. DBS’s leverage ratio of 6.8% is way below its peers with UOB at 7.4% and OCBC at 7.7%. DBS also has a CET-1 ratio of 13.9%, much lower than its peers with UOB at 13.7% and OCBC at 15.2%.

Based on the financial ratios, we can see that OCBC has performed the best with the strongest balance sheet and falling short behind DBS by a small margin when it comes to NIM and Cost/Income Ratio.

Valuation

 Annualized PE RatioPB RatioDividend Yield
DBS @ $28.0415.49x1.196x3.103%
UOB @ $25.3014.97x1.099x3.083%
OCBC @ $11.4014.25x1.054x2.789%

Here comes the most important part for every investor right before they punch in that buy trade, valuation. As we can see, based on their last closed share price, OCBC seems to be the best bargain with the lowest PE and PB ratio.

When looking at yield wise, DBS does take the lead but, you will need to pay a slight premium as compared to its peers for the higher yield which is not really justified.

Should I Take The Scrip?

bank | uob, dbs, ocbc | MAS calls on local banks to cap dividend, offer scrip option

Now as we all know, MAS has imposed onto the 3 local banks to start offering scrip to shareholders as a way to maintain high liquidity. Many investors have been pondering over whether or not the scrip is worth it, taking into account that you might end up with odd lots and such.

Personally, I have been taking and will continue to take all the scrips, should the banks continue to issue them out. The reason being that the scrips are usually offered at a slight discount (in the case of OCBC) and the fact that you can buy more shares without incurring additional commission fees. Of course, for investors with large capital, commission fees are the least of your worries but for smaller investors like myself, each buy/sell transaction can add up to quite a lot of fees.

Not to mention the fact that I’m a long-term investor in the 3 local banks, I do not mind having odd lots because I’m not planning on selling them in the near future. They are under my “Dividend Growth” pie, companies that have a long history of not only giving out good dividends but also consistently increase them year over year. These companies are definitely bought and held for the long run as they keep on giving you larger paychecks as the years go by.

Final Thoughts

DBS definitely performed the best as compared to its peers with OCBC falling short by a small margin and last, UOB. I still have relatively large positions in all 3 banks because I am in it for the long term as mentioned previously. I have taken full scrip entitlements and will continue to take the next few ones should the banks allow.

With the possibility of interest rates hiking again, banks are very well positioned, together with the post-pandemic recovery of the economy. I am also expecting banks to give out strong dividends over the next few years as they have very large cash positions with not much to do. Of course, we have seen DBS and OCBC start acquiring slowly but there will still be a large surplus of cash if MAS still restricts the 3 local banks to a low payout ratio.

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