After the Recent Correction, Are the Banks Worth Investing Now?

banks dbs ocbc pb ratio stocks uob Aug 28, 2017

All examples and stocks quoted here in this article and on the ProButterflyTM site are for learning purposes; it does NOT constitute a Buy/Sell recommendation. Contents are reflective of personal views and readers are responsible for their own investments and are advised to perform their own independent due diligence. If in any doubt about the investment action you should take, you should consult a professional certified financial advisor.


by: Tam Ging Wien

- Prices have corrected, but still above our desired price range

The 3 major local bank stocks have fallen approximately 5.5% in the month of August-2017. DBS has fallen the most from a high of $22.25 and currently trading at $20.42 representing an 8.22% fall. The smaller brothers UOB and OCBC fallen much less from at a high of $24.60 and $11.49 and currently trading at $23.61 and $10.99.

Stock Code

Short Code

Bank

High ($)

Current ($)

Percentage Change (%)

D05.SI

DBS

DBS Group Holdings Ltd

$22.25

$20.42

8.22%

U11.SI

UOB

United Overseas Bank Ltd

$24.60

$23.61

4.02%

O39.SI

OCBC

Oversea-Chinese Banking Corp. Ltd

$11.49

$10.99

4.35%

Average:

5.53%

After this recent correction, are banks worth a buy? We seek to address this question in this post.

Selecting the Valuation Metric

We opt to use a very simple Price-to-Book Ratio (P/B Ratio) method to value the 3 local banks. After all, banks can be considered asset heavy and therefore it would be fair to say that their stock prices should fluctuate within a range of their Net Asset Values (NAV).

The Net Asset Values (NAV) or as it is sometimes known, the book value, is the total amount left over after all assets are sold at the value stated on the financial statements and used to pay off all liabilities. The NAV can be compared to on a per share basis against the trading price of a share. By comparing the NAV per Share to the traded share price, we can ascertain how cheap or how expensive the current stock price is relative to its asset value.

The P/B Ratio is a commonly used metric for valuing a stock price. It is the ratio of the stock price at a specific point of time to the Book Value or the Net Asset Value (NAV) per Share.

The conventional wisdom is that businesses should be constantly earning for the investor. Therefore, if the business is trading as a stock price below the NAV per Share, then the company is worth more “dead than alive”.

Historical Valuations

We started tabulating the NAV of all 3 banks based on its financial year closing from FY2007 to FY2016. We included the H1-2017 figure as well based on the latest half year financial report. We intentionally choose to use FY2007 because we wanted to know what was the valuation carried by the market on these banks prior to the Global Financial Crisis (GFC). After plotting the historical P/B Ratios, we apply a 3 period moving average to the chart.

Company

Share Price ($ as at 22-Aug-2017)

Net Asset Value for FY2017-H1 ($)

P/B Ratio

DBS Group Holdings Ltd

20.70

17.4900

1.18

Oversea-Chinese Banking Corporation Limited

10.41

8.7300

1.19

United Overseas Bank Limited

23.27

19.6300

1.19

Average:

1.1871

The table above captures our H1-2017 figure with the P/B Ratio calculated. We can see that based on the current trading prices of all 3 banks, they have approximately the same P/B Ratio.

We will begin with big brother DBS first.

Source: DBS Group Holdings Ltd Annual Reports

At the current P/B Ratio of 1.18, DBS is presently trading at above the moving average. Out of the 11 periods plotted, the P/B Ratio for DBS has only fallen below the moving average 4 times during FY2008, FY2011, FY2012 and FY2015. Only twice during this last 10 years did DBS have its P/B Ratio fall below 1.00.

Historically, DBS was most undervalued at 0.86 during FY2008 which coincided with the Global Financial Crisis.

It would therefore be reasonable to conclude that should DBS fall below the moving average, it would represent a medium term buying opportunity. Should DBS ever have its P/B Ratio fall below 1.00, it is an almost once in a decade buying opportunity and investors should accumulate DBS shares.


Source: United Overseas Bank Limited Annual Reports

The chart shows a similar pattern to DBS. However, UOB has historically never traded below a P/B Ratio of 1.00. Therefore, should UOB ever trade near 1.01, it would be an accumulating opportunity. Interestingly, UOB is trading a much lower valuation now compared to the GFC! We are wondering why ourselves! Perhaps if any reader has an answer to this, we would be happy to hear your thoughts.

Finally, on to OCBC.


Source: Oversea-Chinese Banking Corporation Limited Annual Reports

Interestingly, OCBC did not trade below a P/B ratio of 1.00 during the GFC. For the first time in a decade, OCBC during FY2015 traded just slightly below 1.00.

Target Prices for Accumulation

Clearly despite the recent 5.53% fall, all 3 local banks are still not at historically low valuation points.

To plan our accumulation of the 3 banks, we take the lowest two P/B Ratios as a guiding price range. We then use the latest reported NAV to estimate these price ranges. We tabulate our figures in the table below:

Bank

Net Asset Value for FY2017-H1 ($)

Lowest P/B Ratio

2nd Lowest P/B Ratio

Translated Price Range (Lower)

Translated Price Range (Higher)

Share Price ($ as at 22-Aug-2017)

DBS

17.49

0.8605

0.9468

15.05

16.56

20.70

OCBC

8.73

0.9863

1.1060

8.61

9.66

10.41

UOB

19.63

1.0140

1.1116

19.91

21.82

23.27

So based on the tabulated information above, it seems like the accumulation range for long term buy and hold (6 to 10 years) are as follows:

  • DBS: $15.05 – $16.56
  • OCBC: $8.61 – $9.66
  • UOB: $19.91– $21.82

Of course these are likely to be major crisis level prices (ie GFC), what about during non-crisis periods?

Target Prices for Medium Term Holdings

Looking back at the charts, we can see that there were also buying opportunities during non-crisis periods whenever the prices trade with a P/B Ratio below the 3 period moving average.

At the moment, the moving averages for all 3 banks are as follows:

  • DBS: 1.110 (translates to $19.41)
  • OCBC: 1.120 (translates to $9.78)
  • UOB: 1.109 (translates to $21.77)

Prices below the moving average level above would be buying opportunities for holding on during the medium term (3 to 5 years).

Summary

The 3 local banks are considered fairly strong counters and are likely to weather and serious storms that come their way. Investors however need to recognise that banks are cyclic counters and they are likely to trade at discounts during times of economic uncertainly and at a premium during times of economic prosperity.

Due to the nature of banks being asset heavy counters, we are able to relatively measure this discount and premium based on historical P/B Ratio valuations.

If investors are looking to invest in banks with a long term horizon and hold for 6 to 10 years, they could consider waiting for a major crisis and purchase these counters at a significant discount. The price ranges from our estimations as good entry point with a reasonable margin of safety are summarised as follows:

  • DBS: $15.05 – $16.56
  • OCBC: $8.61 – $9.66
  • UOB: $19.91– $21.82

We would prefer to err on the safe side and accumulate towards the lower end of these ranges during a crisis period.

If however investors are in mid-cycle and only have a medium term holding period anywhere between 3 to 5 years, they would be taking a higher risk by picking up the counters anywhere from 5% to 10% below the moving average prices, the ranges are summarized as follows:

  • DBS: $17.44 – $18.44
  • OCBC: $8.80 – $9.29
  • UOB: $19.59 – $20.68

We wish to caution readers that these values are based on 31-December year and closing prices and do not reflect the price fluctuations within the year. Therefore, it is possible that the prices could have traded much lower during parts of the year. 31-December dates may show a higher share price due to year end rallies or window dressing activities. Therefore for crisis level prices, we will want to pick up closer to the lower end of the range.

Based on the data collected and observation of the chart patterns, this method to decide the stock entry price appears to work best for DBS compared to UOB or OCBC. This can be seen in the long term range vs the medium term range of overlaps.

Therefore to answer the question, we think that its not worth investing at the moment and would rather wait for better prices in the future. We have prepared price ranges to guide our decision making in the future.

Readers should only use these figures as a guide and are advised to do their own due diligence before investing in anything stock.


Disclosure Statement

The views and opinions expressed herein are those of Tam Ging Wien (“the author”) and do not necessarily reflect the official policy, position or view of the author’s employer, organization, committee or other group(s) or individual(s).

The author at time of writing does not hold any stake in DBS Group Holdings Ltd, Oversea-Chinese Banking Corporation Limited and United Overseas Bank Limited.


 

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