Sunday, June 26, 2005
Local Banks - A Case Study
The figures fm the fllwg table are extracted fm the periodical SHARES Investment (Issue 254),
| OCBC | 2001 | 2002 | 2003 | 2004 | 1Q05 |
|---|---|---|---|---|---|
| Margin (%) | 25.28 | 26.31 | 38.92 | 42.18 | 39.25 |
| ROE (%) | 8.81 | 7.23 | 9.49 | 10.34 | -- |
| DIV (S$) | 0.18 | 0.20 | 0.23 | 0.38 | 1.25 |
| EPS (S$) | 0.603 | 0.517 | 0.745 | 0.883 | 0.227 |
| Turnover (S$M) | 3862 | 3441 | 3138 | 3685 | 1030 |
| UOB | 2001 | 2002 | 2003 | 2004 | 1Q05 |
|---|---|---|---|---|---|
| Margin (%) | 28.46 | 29.79 | 36.69 | 40.23 | 37.24 |
| ROE (%) | 7.27 | 7.98 | 9.05 | 10.80 | -- |
| DIV (S$) | 0.40 | 0.40 | 0.60 | 0.60 | -- |
| EPS (S$) | 0.770 | 0.640 | 0.765 | 0.945 | 0.264 |
| Turnover (S$M) | 4208 | 4617 | 4383 | 4765 | 1412 |
| DBS | 2001 | 2002 | 2003 | 2004 | 1Q05 |
|---|---|---|---|---|---|
| Margin (%) | 20.79 | 25.70 | 26.30 | 39.42 | 32.62 |
| ROE (%) | 7.38 | 7.71 | 6.88 | 12.23 | -- |
| DIV (S$) | 0.30 | 0.30 | 0.30 | 0.40 | 0.11 |
| EPS (S$) | 0.691 | 0.746 | 0.697 | 1.352 | 0.276 |
| Turnover (S$M) | 6559 | 5907 | 5463 | 6373 | 1582 |
Buffett's criteria for managerial excellence
- Margin - Fm 2003, OCBC enjoys the highest margin, at an average of 40%. UOB has average margin of 38% and DBS lowest at 33%.
- ROE - Fm 2003, OCBC and UOB has ROE of 9-10% while DBS is closer to an average of 9%. DBS big difference in 2003 of 6.88% and 12.23% in 2004 is likely due to conservative accounting treatment in 2003, resulting in write-backs in 2004 (Same large diff is seen in EPS and Margin).
Other Criteria
- DIV - All 3 banks have been paying consistent dividends which are increasing over the years. OCBC just paid a high special dividend of $1.25 recently.
- EPS - OCBC shows good EPS growth over the last 5 years. The dividend cover is the highest amongst the 3 banks and this could explain the large special dividend in 1H05. Turnover was declining fm 2001-03 but coupled with EPS growth, it could mean that OCBC had become better at getting good quality business. EPS in 1Q05 is very much similar for all 3 banks with DBS the highest, followed by UOB and OCBC.
Non-Financial Criteria
- Simple and Understandable - The business of banking is complex but if you just look on the surface, it's simple for the investors to understand ie. loans and deposits.
- Consistent Operating History - ROE moves within a 1-2% range over the 5 years, except for DBS big difference between 2003 and 2004. Margin improved by 12% for OCBC and 7% for UOB in 2003 while that of DBS went up by 13% in 2004. Turnover and EPS for all 3 banks showed good improvements fm 2004 onwards.
- Favourable Long Term Prospect - Prospect remains good for all 3 local banks although with the opening of the banking industry to foreign banks, it'll become more competitive. Still, they have a long head start in the local mkt and it'll take a while before we see any major impact by the foreign banks. Longer term growth will have to come from their overseas expansion. Here, DBS takes the lead (but may be the reason for their low margin), with UOB (suffering losses in Phillipines) next and OCBC being the least aggressive so far.
Conclusion - In my opinion, all the banks meet the sub-set of criteria set out, although their growth for the last 5 years had not been very significant (only UOB shows a higher turnover in 2004 vs 2001). DBS, with it's links to the government has been the most aggressive so far in overseas expansion. Both DBS and OCBC have also moved towards the direction of having experienced professionals at the top hierarchy running the bank while UOB is still very much a Wee-family controlled and managed concern. That is not to say is not well run but in the mid term, there may be uncertainties when the baton is passed to the next generation. UOB and OCBC also have non-bank holdings which they need to divest by next year (MAS regulation) and shareholders may benefit from such divestment exercises.
My Action - To decide which bank to invest in. Currently, more in favour of OCBC as it's the smallest and may have better growth in the short term (or being acquired). It also looks better managed when you look at their finacials but that could be due to it being the least aggressive in their overseas expansion (and not suffering the write-offs due to the poor regional economies the past few years). The current rights issue will result in 20% more shares if all are exercised and result in lowering furture EPS and ROE. Dividend per share may also suffer.
There's also the coming 1-for-1 stock split which will make it the most 'affordable' bank stock to small retail investors. Note that in theory, any split or bonus issue does not change the fundamentals of the co. and should not affect the share price. But, observe the impact of SPH price after it did a 1-for-5 split a few months back (even though you could have bought SPH100 before the split!).
Report fm JPMorgan dated 7-Jul here
They recommended a BUY for DBS and not OCBC or UOB
Disclaimer : Use the above at your own risk! We'll not be responsible for any losses incurred but you can give us credit if you make money :D
Comments:
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I guess all three banks has rock solid fundamentals and transparent, as you can get these numbers from the banks website.
Its a matter of when to buy - its PER and market.
It will be interesting to see how the rights issue and stock split works out.
Any arbitrage opportunites?
I tend to disagree its a better managed bank. Knowing the de-regulation of the banking sector and increased competition, I think OCBC is not aggressive enough and its questionable if the good balance sheet is sustainable for the longer term.
Its a matter of when to buy - its PER and market.
It will be interesting to see how the rights issue and stock split works out.
Any arbitrage opportunites?
I tend to disagree its a better managed bank. Knowing the de-regulation of the banking sector and increased competition, I think OCBC is not aggressive enough and its questionable if the good balance sheet is sustainable for the longer term.
OCBC arbitrage opportunity discussed here,
http://www.wallstraits.com/community/viewthread.php?tid=1793
Look at DBS margin n ROE for being aggressive in expansion. OCBC, I think did a good job in improving their fundamentals 1st before starting their expansion. Now, with the 1-for-5 rights and the coming split, they are also increasing their shares in the mkt. I think they are preparing for bigger things.
I am going to be vested. Q'd for the rights at $6.50.
http://www.wallstraits.com/community/viewthread.php?tid=1793
Look at DBS margin n ROE for being aggressive in expansion. OCBC, I think did a good job in improving their fundamentals 1st before starting their expansion. Now, with the 1-for-5 rights and the coming split, they are also increasing their shares in the mkt. I think they are preparing for bigger things.
I am going to be vested. Q'd for the rights at $6.50.
# posted by 
: June 27, 2005 1:39 PM
: June 27, 2005 1:39 PM
SINGAPORE (XFN-ASIA) - Credit Suisse First Boston (CSFB) said it is maintaining its "outperform" rating for DBS Group, with a target price of 17. 20 sgd, as it feels that margin pressure concerns seem exaggerated.
"This is a 12-month call based on its market share gains and aggressive growth," CSFB said in a note.
"Until the third quarter 2005, we are afraid the positives from loan growth are likely to be negated by margin pressure. But they should show up in profits once margins stabilize which we expect in the fourth quarter," it said.
CSFB said that margin concerns over DBS's operations in Hong Kong are due to severe pressure on loan spreads.
But it said that when it comes to overall margins, compression fears are exaggerated.
CSFB sees DBS's net profit coming in at 1.83 bln sgd this year. This is expected to rise to 2.04 bln sgd in 2006.
At 2.52 pm, DBS was flat at 14.20 sgd on volume of 2.22 mln shares.
"This is a 12-month call based on its market share gains and aggressive growth," CSFB said in a note.
"Until the third quarter 2005, we are afraid the positives from loan growth are likely to be negated by margin pressure. But they should show up in profits once margins stabilize which we expect in the fourth quarter," it said.
CSFB said that margin concerns over DBS's operations in Hong Kong are due to severe pressure on loan spreads.
But it said that when it comes to overall margins, compression fears are exaggerated.
CSFB sees DBS's net profit coming in at 1.83 bln sgd this year. This is expected to rise to 2.04 bln sgd in 2006.
At 2.52 pm, DBS was flat at 14.20 sgd on volume of 2.22 mln shares.
# posted by : June 27, 2005 5:04 PM
: June 27, 2005 5:04 PM
SINGAPORE (XFN-ASIA) - Lehman Brothers said it has raised its target price for Oversea-Chinese Banking Corp (OCBC) to 13.10 sgd from 12.75 sgd, after the bank said last week that it will set aside an additional 500 mln sgd for the on-market purchase of its shares for cancellation.
"We estimate this will raise OCBC's 2005 ROE (return on equity) to 11.5 pct, bringing OCBC a step closer to management's target ROE of 12 pct," Lehman Brothers said in a recent note.
OCBC had announced a 500 mln sgd share buyback program last August, and as of last Tuesday, it had spent about 489 mln sgd to purchase a total of 36. 23 mln OCBC shares.
Lehman Brothers said the new 500 mln sgd share buyback program, which will commence once the first exercise is completed, could lead to the cancellation of another 43.48 mln or 2.7 pct of OCBC's outstanding shares, assuming an average buyback price of 11.50 sgd.
At 2.22 pm, OCBC was unchanged at 11.60 sgd on volume of 974,000 shares.
"We estimate this will raise OCBC's 2005 ROE (return on equity) to 11.5 pct, bringing OCBC a step closer to management's target ROE of 12 pct," Lehman Brothers said in a recent note.
OCBC had announced a 500 mln sgd share buyback program last August, and as of last Tuesday, it had spent about 489 mln sgd to purchase a total of 36. 23 mln OCBC shares.
Lehman Brothers said the new 500 mln sgd share buyback program, which will commence once the first exercise is completed, could lead to the cancellation of another 43.48 mln or 2.7 pct of OCBC's outstanding shares, assuming an average buyback price of 11.50 sgd.
At 2.22 pm, OCBC was unchanged at 11.60 sgd on volume of 974,000 shares.
# posted by : July 04, 2005 3:49 PM
: July 04, 2005 3:49 PM
SINGAPORE (XFN-ASIA) - Morgan Stanley said it has an "equal-weight" rating on Oversea Chinese Banking Corp (OCBC) as the stock is fully-valued.
It set its target price on the stock at 12.10 sgd.
"OCBC remains the least preferred exposure in an unexciting sector," Morgan Stanley analyst Matthew Wilson said in a note.
"The environment looks increasingly difficult with peaking Great Eastern Holdings wealth management earnings, difficult Singapore loan/deposit pricing and normalizing loan loss charges," he said.
Wilson said that OCBC looks likely to continue to feel a crunch in margins owing to the sustained flattening of the yield curve and rising deposit/loan pressure.
Morgan Stanley lowered its forecast net interest margin for OCBC by 8 basis points to 1.80 pct.
He added that while growth prospects in Indonesia are attractive, OCBC only has a small exposure there while Morgan Stanley takes a bearish view of its Malaysian operations.
"OCBC will now have to run fast to hit its 12 pct return on equity (ROE) target," he said.
At 3.34 pm, OCBC added 0.10 sgd, or 0.86 pct, to 11.70 on volume of 659, 000 shares.
It set its target price on the stock at 12.10 sgd.
"OCBC remains the least preferred exposure in an unexciting sector," Morgan Stanley analyst Matthew Wilson said in a note.
"The environment looks increasingly difficult with peaking Great Eastern Holdings wealth management earnings, difficult Singapore loan/deposit pricing and normalizing loan loss charges," he said.
Wilson said that OCBC looks likely to continue to feel a crunch in margins owing to the sustained flattening of the yield curve and rising deposit/loan pressure.
Morgan Stanley lowered its forecast net interest margin for OCBC by 8 basis points to 1.80 pct.
He added that while growth prospects in Indonesia are attractive, OCBC only has a small exposure there while Morgan Stanley takes a bearish view of its Malaysian operations.
"OCBC will now have to run fast to hit its 12 pct return on equity (ROE) target," he said.
At 3.34 pm, OCBC added 0.10 sgd, or 0.86 pct, to 11.70 on volume of 659, 000 shares.
# posted by : July 14, 2005 5:13 PM
: July 14, 2005 5:13 PM
SINGAPORE (XFN-ASIA) - Morgan Stanley said it is reiterating its "overweight" call on Singapore Telecommunications Ltd (SingTel), with a target price of 3.00 sgd, as it believes that the group can sustain its strong earnings growth.
Morgan Stanley said that growth of SingTel's associates in India and Indonesia will continue to power overall double digit earnings per share (EPS) growth.
"With double-digit EPS growth, strong cash flow, rising dividends, massive balance sheet optionality and an undemanding valuation (15 pct discount to discounted cash flow), we see SingTel as one of the most attractive telco investments in the region," Morgan Stanley said.
At 10.54 am, SingTel was up 0.01 sgd or 0.37 at 2.70 on volume of 5.84 mln shares.
Morgan Stanley said that growth of SingTel's associates in India and Indonesia will continue to power overall double digit earnings per share (EPS) growth.
"With double-digit EPS growth, strong cash flow, rising dividends, massive balance sheet optionality and an undemanding valuation (15 pct discount to discounted cash flow), we see SingTel as one of the most attractive telco investments in the region," Morgan Stanley said.
At 10.54 am, SingTel was up 0.01 sgd or 0.37 at 2.70 on volume of 5.84 mln shares.
# posted by : July 14, 2005 5:16 PM
: July 14, 2005 5:16 PM
SINGAPORE : Singapore's United Overseas Bank is raising its stake in Indonesia's PT Bank Buana Indonesia.
In a statement, UOB said its wholly-owned subsidiary - UOB International Investment (UOBII) - had entered into an agreement with P.T. Sari Dasa Karsa for the acquisition of 1,729,872,821 shares in P.T. Bank Buana Indonesia Tbk.
The completion of the acquisition is conditional upon certain matters, including the execution of a definitive sale and purchase agreement, and obtaining regulatory consents.
On Friday, UOB requested trading in its shares to be halted pending an announcement. The company has requested the lifting of trading halt on Monday.
UOBII currently owns 23 percent of the issued common shares in Bank Buana. After completion of the acquisition, its shareholding will increase to 53 percent and Bank Buana will become a subsidiary of UOBII.
Upon completion of the acquisition, UOBII will conduct a tender offer for the rest of the shares in Bank Buana.
The total consideration for the sales is approximately S$285 million. UOB intends to fund the acquisition using internal resources.
Mr Wee Ee Cheong, Deputy Chairman of UOB, said: "Bank Buana is one of the oldest and best-run banks in Indonesia. The increased investment reflects our confidence in Bank Buana and the long-term potential of the Indonesian economy." - CNA/de
In a statement, UOB said its wholly-owned subsidiary - UOB International Investment (UOBII) - had entered into an agreement with P.T. Sari Dasa Karsa for the acquisition of 1,729,872,821 shares in P.T. Bank Buana Indonesia Tbk.
The completion of the acquisition is conditional upon certain matters, including the execution of a definitive sale and purchase agreement, and obtaining regulatory consents.
On Friday, UOB requested trading in its shares to be halted pending an announcement. The company has requested the lifting of trading halt on Monday.
UOBII currently owns 23 percent of the issued common shares in Bank Buana. After completion of the acquisition, its shareholding will increase to 53 percent and Bank Buana will become a subsidiary of UOBII.
Upon completion of the acquisition, UOBII will conduct a tender offer for the rest of the shares in Bank Buana.
The total consideration for the sales is approximately S$285 million. UOB intends to fund the acquisition using internal resources.
Mr Wee Ee Cheong, Deputy Chairman of UOB, said: "Bank Buana is one of the oldest and best-run banks in Indonesia. The increased investment reflects our confidence in Bank Buana and the long-term potential of the Indonesian economy." - CNA/de
# posted by : July 16, 2005 5:03 PM
: July 16, 2005 5:03 PM
SINGAPORE (XFN-ASIA) - Property and banking were higher in late afternoon trade after Minister for National Development Mah Bow Tan announced an easing of home mortgage financing rules, dealers said.
At 4.10 pm, the Straits Times index was up 36.91 points or 1.64 pct at 2, 285.05. The Singapore Exchange property index was up 41.13 points or 7.03 pct at 626.62, while the Singapore Exchange finance index was up 44.90 points at 1,631.22.
Among property stocks, CapitaLand was up 0.22 at 2.61, Keppel Land was up 0.18 at 3.0; City Developments was up 0.80 at 8.90 and Wing Tai was up 0.115 at 1.09.
Banks which are seen gaining from additional home mortgage loans were also higher with DBS up 0.50 sgd at 15.20; UOB up 0.40 at 12.30 and OCBC up 0. 30 at 12.90.
Under the proposed changes announced in Parliament, the Monetary Authority of Singapore will allow banks to finance up to 90 pct of residential properties. This is a sharp increase from the previous financing limit of 80 pct.
In addition the minister said half of the required downpayment for property purchases, equivalent to 10 pct of the value, can be paid for using funds from the Central Provident Fund, the state-run pension system, with the other half payable in cash.
"The policy changes are not intended to scale the property market in any direction. Some of the changes will have a positive effect on the market, while others may have a dampening effect," Mah said.
Daiwa Institute of Research analyst David Lum said the policy changes are generally supportive of the property market.
"This will boost property demand and help manage a steady appreciation of property prices," Lum said.
Still, Lum does not believe that the conservative policy on mortgage financing in the past has been the reason for the slow appreciation of residential property prices. Demand for housing has essentially been dampened by rising unemployment and prevailing economic uncertainties, he noted.
S&P Asian Equity Research analyst Winston Siay said the easing of home mortgage rules should boost demand for loans.
"My initial reaction is that its going to be positive," he said, adding that he is likely to revise up his home loan growth forecasts for banks for the year, which is currently pegged at 7-8 pct.
Although some analysts say the risk for banks will increase as a result of easier financing, Siay said he is confident that they will find ways to balance the risks.
"The banks can actually seek mortgage insurance so that's one way in which they can actually mitigate the risk," Siay said.
At 4.10 pm, the Straits Times index was up 36.91 points or 1.64 pct at 2, 285.05. The Singapore Exchange property index was up 41.13 points or 7.03 pct at 626.62, while the Singapore Exchange finance index was up 44.90 points at 1,631.22.
Among property stocks, CapitaLand was up 0.22 at 2.61, Keppel Land was up 0.18 at 3.0; City Developments was up 0.80 at 8.90 and Wing Tai was up 0.115 at 1.09.
Banks which are seen gaining from additional home mortgage loans were also higher with DBS up 0.50 sgd at 15.20; UOB up 0.40 at 12.30 and OCBC up 0. 30 at 12.90.
Under the proposed changes announced in Parliament, the Monetary Authority of Singapore will allow banks to finance up to 90 pct of residential properties. This is a sharp increase from the previous financing limit of 80 pct.
In addition the minister said half of the required downpayment for property purchases, equivalent to 10 pct of the value, can be paid for using funds from the Central Provident Fund, the state-run pension system, with the other half payable in cash.
"The policy changes are not intended to scale the property market in any direction. Some of the changes will have a positive effect on the market, while others may have a dampening effect," Mah said.
Daiwa Institute of Research analyst David Lum said the policy changes are generally supportive of the property market.
"This will boost property demand and help manage a steady appreciation of property prices," Lum said.
Still, Lum does not believe that the conservative policy on mortgage financing in the past has been the reason for the slow appreciation of residential property prices. Demand for housing has essentially been dampened by rising unemployment and prevailing economic uncertainties, he noted.
S&P Asian Equity Research analyst Winston Siay said the easing of home mortgage rules should boost demand for loans.
"My initial reaction is that its going to be positive," he said, adding that he is likely to revise up his home loan growth forecasts for banks for the year, which is currently pegged at 7-8 pct.
Although some analysts say the risk for banks will increase as a result of easier financing, Siay said he is confident that they will find ways to balance the risks.
"The banks can actually seek mortgage insurance so that's one way in which they can actually mitigate the risk," Siay said.
# posted by : July 19, 2005 6:37 PM
: July 19, 2005 6:37 PM
SINGAPORE (XFN-ASIA) - CLSA Asia Pacific Markets said United Overseas Bank Ltd's acquisition of additional stake in PT Bank Buana Indonesia Tbk will boost profits in the next two years but not significantly.
UOB raised its equity stake in Bank Buana to 53 pct from 23 pct after buying an additional 1.73 bln shares from PT Sari Dasa Karsa for 1.65 trln rupiah or 285 mln sgd.
"Assuming some growth in Bank Buana's profits, the 53 pct stake is expected to contribute to about 2-3 pct of UOB Group profits over the next 1-2 years," CLSA said in a note.
In 2004, Bank Buana recorded net profit of 284 bln rupiah. CLSA expects UOB to post a full-year net profit of 1.64 bln sgd this year.
CLSA analyst Prabodh Agarwal said the purchase price was not excessive, citing Bank Buana's strong financial ratios, including a 17.8 pct return on equity and a capital adequacy ratio (CAR) of 22.1 pct.
"This acquisition will hardly dent UOB's strong CAR of 15.4 pct including Tier-1 of 10.9 pct and the bank has potential to return some of the excess capital."
CLSA has an "underperform" rating on UOB.
At 2.02 pm, UOB was flat at 14.40 sgd on volume of 1.02 mln shares.
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UOB raised its equity stake in Bank Buana to 53 pct from 23 pct after buying an additional 1.73 bln shares from PT Sari Dasa Karsa for 1.65 trln rupiah or 285 mln sgd.
"Assuming some growth in Bank Buana's profits, the 53 pct stake is expected to contribute to about 2-3 pct of UOB Group profits over the next 1-2 years," CLSA said in a note.
In 2004, Bank Buana recorded net profit of 284 bln rupiah. CLSA expects UOB to post a full-year net profit of 1.64 bln sgd this year.
CLSA analyst Prabodh Agarwal said the purchase price was not excessive, citing Bank Buana's strong financial ratios, including a 17.8 pct return on equity and a capital adequacy ratio (CAR) of 22.1 pct.
"This acquisition will hardly dent UOB's strong CAR of 15.4 pct including Tier-1 of 10.9 pct and the bank has potential to return some of the excess capital."
CLSA has an "underperform" rating on UOB.
At 2.02 pm, UOB was flat at 14.40 sgd on volume of 1.02 mln shares.
# posted by : July 19, 2005 6:39 PM
: July 19, 2005 6:39 PM << Home
