How Should We Evaluate Oversea-Chinese Banking Corporation Ltd?

As at 1 December 2018, Oversea-Chinese Banking Corporation Limited (OCBC) is trading at S$ 11.26 a share, close to its lowest over the last 12 months.

Source: Google Finance

So, is this a good time to invest in OCBC? Or, should an investment in OCBC be dismissed today?

In this article, I will revisit its fundamentals, bring an update on its latest result, and introduce a few valuation metrics to assess OCBC as an investment. Hence, here are 5 things to know about OCBC before you invest.

#1: Asset Quality

Personally, I will start evaluating a bank stock by checking its asset quality. This involves an assessment of its loan assets, whether or not, they had improved in quality and had grown in size. A bank that has increased its loan assets and had maintained a low default rate should be able to grow its net interest income in the long-run.

For the last 10 years, OCBC has increased its loans and bills receivables from S$ 79.8 billion in 2008 to S$ 234.1 billion in 2017. It reduced non-performing loans (NPL) Ratio from 1.50% in 2008 to 0.60% in 2014. However, NPL Ratio has risen back to 1.50% in 2017 due to loans provided to the oil & gas service sector as it is experiencing a downturn presently.

Source: Annual Reports of OCBC Ltd

Overall, the growth in loan assets had contributed to OCBC’s steady increment in net interest income, up from S$ 2.8 billion in 2008 to S$ 5.4 billion in 2017.

Source: Annual Reports of OCBC Ltd

#2: Non-Interest Income

OCBC derives bulk of its non-interest income from fees & commission arising of sales of unit trusts, bancassurance, and structured deposits to bank customers, private banking, and its insurance arm, Great Eastern Holdings Ltd.

For the last 10 years, OCBC has recorded steady growth in non-interest income from S$ 1.6 billion in 2008 to S$ 4.2 billion in 2017. In 2012, OCBC has recorded substantially higher non-interest income as it had received a disposal gain of S$ 1.3 billion after selling off its investment in Frasers & Neave Ltd and Asia Pacific Brewery Ltd.

Source: Annual Reports of OCBC Ltd

#3: Long-Term Profitability

Growth in both net interest income and non-interest income has resulted in its continuous growth in total income. For the last 10 years, OCBC has achieved an increase in total income from S$ 4.4 billion in 2008 to S$ 9.6 billion in 2017.

Source: Annual Reports of OCBC Ltd

During the period, OCBC has maintained its cost-to-income ratio at around 40% per annum and kept NPL Ratios relatively low. Thus, with stable margins, OCBC has increased its shareholders’ earnings up from S$ 1.7 billion in 2008 to S$ 4.1 billion in 2017. OCBC has a 10-Year Return on Equity (ROE) average of 11.26% a year. This means, it has made S$ 11.26 in annual earnings from every S$ 100.00 in shareholders’ equity.

Source: Annual Reports of OCBC Ltd

#4: Latest Financial Results

Next, I would check whether OCBC had maintained growth in profitability over the last 12 months. From which, I found that OCBC has passed this test with its total income and earnings rising continuously throughout 9 months in 2018. In the 12-month period, OCBC has made S$ 10.0 billion in total income and S$ 4.6 billion in shareholders’ earnings or S$ 1.088 in earnings per share (EPS).

Source: Quarterly Reports of OCBC Ltd

#5: Balance Sheet Strength

In Q3 2018, OCBC has recorded total capital adequacy ratio of 16.1%, has a net stable funding ratio of 108%, and all-currency liquidity coverage ratios of 130%. These regulatory ratios are above their regulatory requirements. Thus, they are indicating that OCBC has maintained a strong funding and capital position as at 30 September 2018. Presently, it enjoys an Aa1 credit rating from Moody’s and is ranked among the World’s Top 5 Safest Commercial Banks by Global Finance in 2018.

#6: Relationship between OCBC’s Profits and Stock Price Performance

In general, stocks that grow profits consistently should achieve sustainability in stock price growth over the long-term. The quickest method to tell, whether or not, a stock has a track record of building shareholders’ wealth is by comparing its 10-Year profit figures with its 10-Year stock price performance.

Of which, I find that OCBC’s stock price performance has reflected its growth in shareholders’ earnings over the long-term.

Source: Google Finance

#7: Stock Valuation

Here, I’ll share a few metrics to value OCBC at S$ 11.26 a share.

(1) P/E Ratio:

In Point 4, I had calculated that OCBC had made S$ 1.088 in EPS for the last 12 months. Its current P/E Ratio is 10.35, below its 10-Year Average of 11.60.

Key Statistics (30 November 2018):

10-Year P/E Ratio Range: 8.60 – 15.32

10-Year P/E Ratio Average: 11.60

Current Gross Dividend Yield: 10.35

(2) PEG Ratio:

OCBC has achieved CAGR of 10.06% in shareholders’ earnings per year over the last 10 years. Thus, its PEG Ratio is 1.03. Its valuation is relatively fair as OCBC’s PEG Ratio is close to 1.00.

(3) P/B Ratio:

In Q3 2019, OCBC has net assets of S$ 9.37 a share. Its current P/B Ratio is 1.20 which is below its 10-Year average of 1.25.

Key Statistics (30 November 2018):

10-Year P/E Ratio Range: 0.97 – 1.55

10-Year P/E Ratio Average: 1.25

Current Gross Dividend Yield: 1.20

(4) Dividend Yields:

In 2017, OCBC has paid out S$ 0.37 in dividends per share (DPS).Thus, OCBC’s dividend yield is 3.29% a year, marginally below its 10-Year average of 3.46%.

Key Statistics (30 November 2018):

10-Year P/E Ratio Range: 1.99% – 5.61%

10-Year P/E Ratio Average: 3.46%

Current Gross Dividend Yield: 3.29%

VIA’s Verdict

OCBC has delivered sustainable growth in total income, earnings and dividends to its shareholders over the past 10 years. Presently, it has kept a solid balance sheet with total capital adequacy ratio of 16.1% and is voted as the top 5 safest commercial banks of the world by Global Finance in 2018.

Presently, at S$ 11.26 a share, OCBC is trading marginally below its 10-Year P/E Ratio and P/B Ratio average, above its 10-Year Dividend Yield Average, and has a PEG Ratio of 1.03. Thus, should we invest in OCBC now?

Well, have you compare it with DBS and UOB? I’m sure, after a comparison, we would know the answer then.

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