Are Our Local Banks Overvalued? How Did DBS, UOB, and OCBC Perform In 1H 2021?

Moving into the 2nd half of 2021, investors are getting excited to jump back into bank stocks with the recent update from MAS, releasing the dividend cap that was placed onto banks in 2020. With our 3 local banks, DBS (SGX: D05), UOB (SGX: U11), and OCBC (SGX: O39) just released their 1H 2021 results, many investors are wondering if they are too overvalued at this point or is there still more upside to go? In this article, I will go through the 1H 2021 results of our 3 local banks as well as discuss if they are still a great investment at its current valuation.

Operating Performance

Year on Year DifferenceRevenueProfit Before AllowancesAllowances MadeNet Profit
DBSS$7.443 billion (-4%)S$4.313 billion (-8%)S$89 million (-95%)S$3.712 billion (+54%)
UOBS$4.903 billion (+5%)S$2.827 billion (+9%)S$383 million (-44%)S$2.011 billion (+29%)
OCBCS$5,486 billion (+7%)S$3,621 billion (+12%)S$393 million (-72%)S$2.661 billion (+86%)

Staring off with the operating performance of the 3 local banks, we can see that OCBC is taking the lead with a 7% growth in revenue and 12% growth in profit before allowances, following its earlier momentum from the 1Q 2021 results release. UOB trails behind slightly at 5% and 9% respectively while DBS actually saw its overall performance slowdown from the year prior, having its revenue fall by 4% and profit before allowances by 8%. The drop in DBS’s revenue and profit before allowances is actually due to the 27bp decline in Net Interest Margin.

As expected, all 3 banks continue to lower their allowances made and in turn, results in a huge jump in net profits. OCBC takes the lead, growing its net profit by a huge margin of 86%, followed by DBS at 54% and UOB at 29%.

Key Financial Ratios

As at 30th Jun 2021Net Interest MarginCost/Income RatioNon-Performing Loans RatioLiquidity Coverage Ratios (LCR)Leverage RatioCommon Equity Tier 1
DBS1.47%42.1%1.5%136%6.8%14.5%
UOB1.56%43.8%1.5%135%7.4%14.2%
OCBC1.57%41.7%1.5%148%8.1%16.1%

Moving onto key financial ratios, and as I’ve mentioned before, is definitely the most important part when analyzing and evaluating a bank. At first glance, OCBC seems to be beating its peers with the highest NIM as well as the lowest cost/income ratio. Just to recap, the Cost/Income ratio is used to see how well the company is managing its costs and spending to generate revenue. In essence, a low Cost/Income ratio signifies that the company is managing its costs well and is not overspending to generate revenue.

The LCR and NPL ratio seems to be rather consistent across the 3 local banks with OCBC taking a huge lead in terms of LCR, standing at a healthy 148%. In addition, OCBC has the highest leverage ratio at 8.1% and the highest CET-1 ratio of 16.1%. DBS’s leverage ratio is the lowest amongst the 3 local banks at 6.8% with UOB trailing ahead at 7.4%. DBS edges UOB out with a CET-1 ratio of 14.5%, narrowly beatting UOB’s 14.2%.

Based on the financial ratios, we can definitely see that OCBC has performed the best with the strongest balance sheet, highest NIM, and most efficient cost/income ratio.

Valuation

 Annualized PE RatioPB RatioExpected Dividend Yield
DBS @ $31.005.38x1.47x4.26% ($1.32)
UOB @ $26.635.64x0.998x4.88% ($1.30)
OCBC @ $12.425.22x1.11x4.27% ($0.53)

Last but not least, before we make any investment, we must always make sure we evaluate the company properly first to avoid overpaying for any asset. Let’s jump right into the current valuation of the 3 local banks based on its last closing price.

All 3 banks are currently priced with a 5x PE ratio and dividend yield more than 4% which beats the CPF SA risk free rate of 4%. Just to note, the expected dividend yield is based on the pre covid FY2019 dividend payout. At its current valuation, UOB seems to be the best pick amongst the 3 local banks with the lowest PB ratio of 0.998x and the highest dividend yield of 4.88%.

Final Thoughts

In summary, OCBC has definitely performed the best as compared to its peers with DBS falling behind by a slight margin and UOB coming in close behind. OCBC definitely still has some more upside potential due to its subsidiaries being able to help accelerate its recovery and overall growth as they are well positioned to ride the growth in the wealth market in China and the overall Greater Bay Area.

With the possibility of interest rates hiking again, banks are very well positioned, together with the post-pandemic recovery of the economy. As expected from my previous few results coverage, MAS has finally decided to lift the dividend cap on the 3 local banks. This means that the banks can start rewarding shareholders who have been patiently waiting on the sidelines through generous dividend payouts.

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