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Which Local Bank Should You Invest In? How Did DBS, UOB, and OCBC Perform In FY2023?

Coming into 2024, investors might be wary of investing in banks as there are several forecasts on potential rate cuts throughout the year, with a net terminal rate of 4.25% – 4.50%. Despite this, I think our 3 local banks namely DBS (SGX: D05), UOB (SGX: U11), and OCBC (SGX: O39) are still very well positioned to do well. As all 3 banks have recently released their FY2023 results, investors are curious about which one did the best! In this article, I’ll cover the FY2023 results and compare the 3 local banks on which one should you invest in.

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FY2023 Operating Performance

Year on Year DifferenceRevenueProfit Before AllowancesAllowances MadeNet Profit
DBSS$20.18 billion (+22%)S$12.124 billion (+29%)S$590 million (+149%)S$10.286 billion (+23%)
UOBS$13.932 billion (+20%)S$8.224 billion (+24%)S$921 million (+53%)S$6.06 billion (+26%)
OCBCS$13.507 billion (+20%)S$8.284 billion (+28%)S$733 million (+25%)S$7.021 billion (+27%)

Starting off with the operating performance of the 3 local banks, we can see that DBS has grown its revenue the most by 22%, with UOB and OCBC trailing behind at approximately 20%. When we look at the profit before allowances, DBS also takes the lead at 29%, with OCBC and UOB trailing behind at 28% and 24%.

Looking at the allowances made, we can see that all 3 local banks accounted for more allowances in FY2023, with DBS increasing the most year over year by 149%, with UOB and OCBC trailing behind at 53% and 25% respectively. Taking aside the year-over-year growth, DBS also had the most allowances made in terms of dollar value at S$353m, followed by UOB at S$318m, and followed by OCBC at S$149m. 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 huge net profits for FY2023 with OCBC growing their net profits the most by 27% year over year, with UOB and DBS leading behind at 26% and 23% respectively.

Key Financial Ratios

As at 31st Dec 2023Net Interest MarginCost/Income RatioNon-Performing Loans RatioLiquidity Coverage Ratios (LCR)Leverage RatioCommon Equity Tier 1
DBS2.15%40%1.1%144%6.6%14.6%
UOB2.09%41.5%1.5%158%6.9%13.4%
OCBC2.28%38.7%1.0%155%7.2%15.9%

Moving onto key financial ratios, as I’ve mentioned before, is definitely the most important part when analyzing and evaluating a bank. At first glance, we can see that OCBC has the highest NIM at 2.28% while its peers are trailing behind with DBS at 2.15% and UOB at 2.09%.

Next, we will look at the Cost/Income ratio which OCBC is leading as well at 38.7% whereas DBS and UOB trail behind at 40% and 41.5%. 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.

Moving onto the NPL ratio, we can see that OCBC has the lowest NPL at only 1% with DBS and UOB trailing behind at 1.1% and 1.5% respectively. When comparing the LCR, UOB leads the pack at 158% with OCBC and DBS trailing behind at 155% and 144% respectively. In addition, OCBC has the highest leverage ratio at 7.2% and the strongest CET-1 ratio at 15.9%. DBS’s leverage ratio is the lowest amongst the 3 local banks at 6.6% with UOB trailing ahead at 6.9%. DBS edges UOB out with a CET-1 ratio of 14.6%, beating UOB’s 13.4%.

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 @ $33.758.52x1.46x5.69% ($1.92)
UOB @ $28.308.47x0.97x6.01% ($1.70)
OCBC @ $13.238.54x1.12x6.20% ($0.82)

Based on the last closing price of the 3 local banks, we can see that UOB 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 8.52x PE with a PB of 1.46x. OCBC trails behind closely with a slightly higher PE of 8.54x but a much lower PB ratio of 1.12x. UOB comes last with a PE of 8.47x and a PB ratio of only 0.97x. When comparing the annualized forward dividend yield, OCBC has the highest yield at 6.20% with UOB coming in second with a yield of 6.01% and DBS following close behind in 3rd place at 5.69%.

It is important to note that this isn’t factoring the bonus issue from DBS which is coming together with the next dividend ex-date. Factoring that in, investors can expect a yield closer to 7.04%. This is calculated by factoring in the bonus-issued shares (10 to 1) which will provide additional dividends to investors in the future. If we assume the same dividend payout for the next 4 quarters, investors will receive a total of $237.6 in dividends on their initial investment of $3375 ($33.75 x 100 shares).

Another good metric to valuate these banks would be using ROE or ROCE. Return on equity (ROE), also known as return on common equity (ROCE), is a measure of a business’s profitability. Specifically, it is a ratio describing the rate of profit growth a business generates for shareholders and owners. DBS has the strongest ROE at 17.1%, growing from 16.8% last year. UOB comes second at 14.2% as compared to a year ago at 11.9%. OCBC comes last with an ROE of 13.7% as compared to a year ago at 11.1%.

Final Thoughts

In summary, all 3 local banks performed remarkably in FY2023, taking advantage of the high interest rate environment and improving their NIM significantly. Based on the valuation metrics above, we can see that UOB can be considered undervalued with a PB of only 0.97x and a low PE of only 8.47x. DBS on the other hand, is rather expensive when we look at its PB of 1.46x but we have to consider that the PE is also in line with its peers at 8.52x. Another reason why I find all 3 local banks undervalued is because they are yielding near 6% which is quite uncommon as they are usually yielding within the range of 4% in the past.

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 had the most growth in terms of net profit whereas DBS had the lowest growth. Despite DBS having the lowest growth in net profit YoY, we need to account for the fact that it made a lot of allowances (~S$353m), a 149% increase year over year as compared to its peers which only grew their allowances by 53% and 25% respectively. When we talk about valuation, UOB is the cheapest with a PE of only 8.47x, PB of only 0.97x, and a forward annualized yield of 6.01%, which is higher than our risk-free rate in Singapore (CPF SA – 4%).

Taking all these factors into account, I will pick DBS now in comparison to the other 2 local banks because of the bonus issue that is coming up for investors. Factoring in the bonus-issued shares, the yield for DBS skyrockets to a little over 7% which is very attractive, especially for dividend investors. DBS also has a strong track record of growing its dividends year over year which is an extra “compounding effect” for investors who received the bonus shares. Taking aside the bonus issue of shares, I will go with OCBC instead, as it has the strongest performance with the highest yield and a reasonable PB ratio of only 1.12x.

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