Our 3 local banks, DBS (SGX: D05), UOB (SGX: U11), and OCBC (SGX: O39), have once again uplifted the Singapore exchange single-handedly. They have performed remarkably over the past few years since the pandemic. As they help the STI break all-time highs, investors are becoming concerned about its share price and valuation. Could a correction be coming on the horizon or is there more upside that has yet to be realized? In this article, we’ll analyze the FY2024 results of the 3 local banks and find out which one is worth your investment right now.
FY2024 Operating Performance
| Year on Year Difference | Revenue | Operating Profit Before Allowances | Allowances Made | Net Profit |
|---|---|---|---|---|
| DBS | S$22.297 billion (+10%) | S$13.402 billion (+11%) | S$622 million (+5%) | S$11.289 billion (+12%) |
| UOB | S$14.294 billion (+3%) | S$8.22 billion (+1%) | S$926 million (+1%) | S$6.045 billion (+6%) |
| OCBC | S$14.473 billion (+7%) | S$8.731 billion (+5%) | S$690 million (-6%) | S$7.748 billion (+8%) |
Starting with the operating performance of the 3 local banks, we can see that DBS has grown its revenue the most by 10%, with OCBC trailing behind at 7% and UOB at only 3%. When we look at the operating profit before allowances, DBS takes the lead at 11%, with OCBC and UOB trailing behind at 5% and 1%.
Looking at the allowances made, we can see that DBS and UOB accounted for more allowances in FY2024 by 5% and 1% respectively while OCBC reduced their allowances made by 6%. Looking at the absolute dollar value, DBS increased its allowances made by S$32m and UOB increased its allowances made by S$5m, and OCBC reduced its allowances made by S$43m. This could imply that OCBC either has a more diversified debt portfolio or is more confident that there will be lesser bad debt to account for moving forward.
Lastly, we can see that all 3 local banks made strong growth in net profits for FY2024 with DBS improving its net profits by 12% year over year, with OCBC trailing behind at 8% and UOB at 6%.
Key Financial Ratios
| Year on Year Difference | Net Interest Margin | Cost/Income Ratio | Non-Performing Loans Ratio | Liquidity Coverage Ratios (LCR) | Leverage Ratio | Common Equity Tier 1 |
|---|---|---|---|---|---|---|
| DBS | 2.13% (-0.02%) | 39.9% | 1.1% | 147% (+3%) | 6.7% (+0.1%) | 17.0% (+2.4%) |
| UOB | 2.03% (-0.06%) | 42.5% (+1%) | 1.5% | 148% (-10%) | 6.9% | 15.5% (+2.1%) |
| OCBC | 2.20% (-0.08%) | 39.7% (+1%) | 0.9% (-0.1%) | 140% (-5%) | 7.4% (+0.2%) | 17.1% (+1.2%) |
Moving onto key financial ratios, as I’ve mentioned before, is the most important part when analyzing and evaluating a bank. At first glance, we can see that OCBC has the highest NIM at 2.20% while its peers are trailing behind with DBS at 2.13% and UOB at 2.03%. We can also see that all 3 banks had their NIM fall as interest rates are going through cuts, with OCBC falling the most by 0.08%, UOB by 0.06% and DBS the least, by a mere 0.02%.
Next, we will look at the Cost/Income ratio which OCBC is leading as well at 39.7% whereas DBS and UOB trail behind at 39.9% and 42.5%. 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. With that in mind, we can see that UOB and OCBC saw their Cost/Income ratio increase year over year by 1% while DBS held steady.
Moving onto the NPL ratio, we can see that DBS and OCBC are rather close at 1.1% and 0.9% respectively while UOB trails behind at 1.5%. Despite this, all 3 banks are rather stable with low NPL ratios. Comparing the LCR, we can see that DBS saw a slight growth of 3% whereas UOB and OCBC saw a decline of 10% and 5% respectively. Nonetheless, UOB still leads with the highest LCR at 148%, DBS trails closely at 147% and OCBC is last at 140%.
In addition, OCBC has the highest leverage ratio at 7.4% and the strongest CET-1 ratio at 17.1%. DBS’s leverage ratio is the lowest amongst the 3 local banks at 6.7% with UOB trailing ahead at 6.9%. DBS edges UOB out with a CET-1 ratio of 17.0%, beating UOB’s 15.5%.
Based on the financial ratios, we can see that OCBC has performed the best with the strongest balance sheet, highest NIM, and efficient cost/income ratio.
Valuation
| Annualized PE Ratio | PB Ratio | Expected Dividend Yield | |
|---|---|---|---|
| DBS @ $46.61 | 11.83x | 1.99x | 6.46% ($2.4+$0.60) |
| UOB @ $38.51 | 10.82x | 1.37x | 5.97% ($1.8+$0.50) |
| OCBC @ $17.37 | 10.40x | 1.36x | 5.81% ($0.85+$0.16) |
Based on the last closing price of the 3 local banks, we can see that OCBC is the cheapest in terms of valuation as compared to its peers whereas DBS is the most expensive bank in terms of valuation. At the last closing price, DBS is valued at an 11.83x PE with a PB of almost 2x. UOB trails behind closely with a PE of 10.82x and a much lower PB ratio of 1.37x. OCBC comes last with a reasonable PE of 10.40x and a PB ratio of 1.36x. When comparing the annualized forward dividend yield, DBS has the highest yield at 6.46% with UOB coming in second with a yield of 5.97% and OCBC following close behind in 3rd place at 5.81%.
It is important to note that all 3 local banks have announced capital return programmes which include share buybacks and special dividends being paid out over the next few years. So which bank made the most attractive offer?
Firstly, DBS announced a capital return program that will see an additional 15 cents of special dividends being paid quarterly over FY2025, which amounts to a full 60 cents of special dividends in FY2025. The management also expects to continue paying out a similar amount of capital over the subsequent 2 years, either through the same mechanism (special dividends) or other methods such as share buybacks or simply increasing the ordinary dividend.
Secondly, UOB announced a similar capital return program, expecting to pay a special dividend of 50 cents per share over 2 tranches in 2025. There will also be a S$2B share buyback program over the next 3 years. Lastly, OCBC announced a unique approach, by increasing the dividend payout ratio from 50% to 60%, with the additional 10% in the form of special dividends. There will also be share buybacks done over the next 2 years, targeting a total capital return of S$2.5B.
Taking it all in, DBS and UOB have proposed a rather attractive capital return program, using a hybrid approach of special dividends and share buybacks to reward shareholders. OCBC has proposed something similar as well but instead of an absolute dollar value, the dividend payout will be pegged directly to its earnings because it is using a payout ratio instead. This could be a good or bad thing for shareholders because, if OCBC does well and sees its earnings improve fast, then the higher payout ratio will result in more dividends being paid year over year. Should OCBC see earnings decline, then the dividends will follow suit, which will be bad for shareholders.
Possible Headwind/Tailwind
With the 3 local banks breaking all-time highs again, are there any more potential growth catalysts for them to grow over the next 12 months, especially with so much uncertainty in the market such as recession and inflation fears? There is 1 key factor that could be a headwind or tailwind for banks – interest rate movement.
Ever since the Trump administration restarted in 2025, the market has been very volatile and under a lot of uncertainty. There are renewed fears of inflation growing again which will result in rate cuts being paused and a possible recession in the worst case. We all understand that the change in interest rate will impact the banks but in what way exactly?
When interest rates are higher, banks can make more money either by charging higher interest on loans or by taking advantage of the difference between the interest banks pay to customers and the interest the bank can earn by investing. At times, a bank might pay its customers a full percentage point less than it earns through investing in short-term interest rates. As such, we will need to understand what is the CASA ratio for a bank.
In short, the CASA ratio stands for the “current and savings account” ratio. The CASA ratio of a bank is the ratio of deposits in current and savings accounts to total deposits. A higher CASA ratio indicates a lower cost of funds because banks usually give a much lower interest rate on current and savings accounts. Indirectly, a higher CASA ratio will translate to a higher net interest margin as well for banks. UOB has the highest CASA ratio at 54.6%, with DBS trailing behind at 51.8% and OCBC at 48.8%.
Final Thoughts
In summary, all 3 local banks performed remarkably in FY2024, still outputting sustainable growth to their business and shareholders in the form of dividends. Based on the valuation metrics above, we can see that OCBC and UOB can be considered fairly valued with a PB of 1.36x and 1.37x, and an acceptable PE ratio of 10.40x and 10.82x. DBS on the other hand, is rather expensive when we look at its PB of almost 2x and PE ratio of 11.83x, which is far higher than its peers. Despite this, DBS is also giving the highest yield at 6.46% and churning out the fastest dividend growth rate amongst its peers.
Among the 3 local banks, we can see that OCBC has done the best with the strongest balance sheet, highest NIM as well as efficient cost/income ratio. It also saw comparable growth in terms of revenue and net profit amongst its peers. When we talk about valuation, OCBC is also the cheapest with a PE of only 10.40x, PB of only 1.36x, and a forward annualized yield of 5.81%, which is higher than our risk-free rate in Singapore (CPF SA – 4%).
If I were to pick 2 banks to invest in right now, it would be DBS and OCBC, putting more emphasis on DBS. DBS for its strong performance and dividend growth, and OCBC for its attractive valuation in comparison to its peers. That isn’t to say that UOB is not a good investment but in comparison, it does lag behind the other 2 banks when we look at it from an investment perspective, weighing the pros and cons, as well as the potential upside and downside risk.