facebookDBS, OCBC and UOB: Are They Still Undervalued?
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DBS, OCBC and UOB: Are They Still Undervalued?

profileSudhan P
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Singapore’s three listed banks — DBS Group Holdings Ltd (SGX: D05), Oversea-Chinese Banking Corporation Limited (SGX: O39) and United Overseas Bank Ltd (SGX: U11) — have garnered plenty of interest over the past few months. 

Since the later part of October 2020, when compared to Singapore’s stock market barometer, the Straits Times Index (STI), the banks have done pretty well. 

For instance, OCBC shares have risen 37% versus the STI’s increase of 27%. OCBC is currently the best-performing bank of the lot.

Source: Yahoo! Finance

Increased optimism about the world getting back to normal with the vaccine roll-outs could have helped to lift investor sentiment. 

With the banks’ share prices going up of late, investors could be wondering: “Is there value still in the banks at their latest stock prices?” 

To help investors answer that question, let’s compare the historical price-to-book (PB) ratios, price-to-earnings (PE) ratios, and dividend yields of the three banks with their latest valuations.

Bank #1: DBS

First, let’s look at the biggest bank of ’em all, DBS.

The table below is a snapshot of DBS’ valuation from 2016 to 2020:

Source: DBS 2020 annual reportHere’s a quick analysis of DBS’ past valuation:

  1. DBS past dividend yield (excluding special dividends): Ranged from 3.9% to 4.8%, with an average of 4.4%
  2. DBS past PE ratio: Was between 9.3x and 12.3x, translating to an average ratio of 11.2x
  3. DBS past PB ratio: Fluctuated from 0.9x to 1.5x, giving an average of 1.2x

DBS is currently trading a share price of S$29.01 on 19 April. This translates to the following valuations:

  1. DBS dividend yield (forward): 2.5%
  2. DBS PE ratio: 15.7x
  3. DBS PB ratio: 1.4x

The Monetary Authority of Singapore (MAS) called on local banks to cap their total dividends per share for 2020 at 60% of 2019’s dividends.

DBS said that the MAS cap restricts its cumulative dividends to 72 cents per share for the next four quarters starting from the 2020 second-quarter, or 18 cents per quarter. 

Using this, DBS’ forward dividend yield is 2.5%. The yield includes the payout in DBS’ 2021 first-quarter (yet to be announced). 

Compared to history, DBS looks expensive using all three valuation metrics. 

Bank #2: OCBC 

Next up, let’s look at OCBC’s valuation from 2016 to 2020:

Source: OCBC 2020 annual reportHere’s a quick look at OCBC’s past valuation:

  1. OCBC past dividend yield: Ranged from 3.3% to 4.8%, with an average of 3.9% 
  2. OCBC past PE ratio: Was between 9.7x and 11.8x, translating to an average ratio of 10.9x
  3. OCBC past PB (or price-to-NAV) ratio: Fluctuated from 0.8x to 1.3x, giving an average of 1.1x

At OCBC’s share price of S$11.93 on 19 April, the latest valuations are:

  1. OCBC dividend yield: 2.7%
  2. OCBC PE ratio: 14.9x
  3. OCBC PB ratio: 1.1x

OCBC’s current dividend yield and PE ratio look more expensive than average now. The bank’s PB ratio is on par with the mean. 

Bank #3: UOB

Last but not the least, let’s explore UOB’s valuation from 2016 to 2020:

Source: UOB 2020 annual reportHere’s a quick analysis of UOB’s past valuation:

  1. UOB past dividend yield (including special dividends): Ranged from 3.6% to 5.0%, with an average of 4.2%
  2. UOB past PE ratio: Was between 10.0x and 12.7x, translating to an average ratio of 11.2x
  3. UOB past PB ratio: Fluctuated from 0.9x to 1.3x, giving an average of 1.1x

UOB is selling at a share price of S$26.17 on 19 April. This translates to the following valuations:

  1. UOB dividend yield: 3.0%
  2. UOB PE ratio: 15.5x
  3. UOB PB ratio: 1.1x

Similar to OCBC, UOB’s dividend yield and PE ratio look more expensive than average now while its PB ratio is on par with the mean. 

Putting It All Together 

The banks’ valuations look expensive at the moment. But we should also remember that they are on the back of a capped dividend payout (due to the MAS intervention) and depressed earnings from the pandemic. 

DBS’ 2020 net profit, for instance, fell 26% year-on-year to S$4.72 billion, down from S$6.39 billion a year back.

But looking ahead, DBS cited that the latest economic data support a strong economic rebound for 2021. Its credit outlook is also positive. 

Overall, with the gradual improvement in consumer sentiments and business confidence, the Singapore banks have a bright future. It may be a good time to consider buying into them.  

Having said that, in the near term, the banking trio could see their share prices continuing to be volatile as they are near their 52-week highs. Investors who are investing in the banks must be able to stomach this volatility.

What’s Your Take on Singapore Banks? 

Check out the community at Seedly and participate in the lively discussion regarding banking stocks and more!

Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any stock. The writer may have a vested interest in the companies mentioned.

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About Sudhan P
It isn't fair competition when only one company in the world makes Monopoly. But I love investing in monopolies. Before joining the Seedly hood, I had the chance to co-author a Singapore-themed investment book – "Invest Lah! The Average Joe's Guide To Investing" – and work at The Motley Fool Singapore as an analyst.
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