Banking Shares - Which is the best to buy now?

With the recent drop in the price of bank stocks in Singapore, namely DBS, OCBC and UOB, due to the Fed interest to remain stagnent due to the soft data from the US. Since I think that the banks would not be largely affected by this development much, the reasons covered in more detail at Does the Recent Drop in the STI Represent a Good Buying Oppourtunity?, this presents a good buying opportunity in my opinion for investors to pick up bank stocks. But then there is the next question: Which is the best to buy now?

                   

(Image sources: 

UOB: http://www.uobgroup.com/about/story/our_logo.html

OCBC:http://ocbc.kartright.com/

DBS: http://avpn.asia/organisation/dbs-bank-ltd/)

To decide on this, we can look at the P/E ratio of the three banks and compare them together.

DBS - 12.8
UOB - 11.6
OCBC - 9.9
In this measure OCBC comes out on top with the lowest P/E ratio.

Then we can look at P/B ratio, which is another accepted comparison model.

DBS - 1.31
OCBC - 1.24
UOB - 1.19

UOB comes out on top with the lowest P/B ratio.

But we can also look at current dividend yields on the stock.

DBS - 2.80%
UOB - 3.06%
OCBC - 3.57%

OCBC comes up with the highest dividend yield with matches them having the highest P/E ratio out of the 3 banking stocks.

In my opinion, OCBC seems to be a more conservative bank than DBS and UOB and hence would have a lower risk discount than the other two banks, which will give it a higher valuation with the DDM. But following the DCF Model, DBS appears to be the best bank as it used a lot less cash in its operating activities than the other two banks in the last twelve months ending in 31 March 2015.

Looks like it depends on which model you use for valuation to decide which is the best bank to invest in currently, hope this post has been able to highlight some of the merits of each bank when comparing against the others. To read more on the two valuation models, Dividend Discount Model and Discounted Cash Flow Model, click on the two links.

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Update: Thanks to Felix Leong for the comment on Tier 1 capital for banks (I'm learning something new here...). Tier 1 capital is the total equity of the bank along with the addition of non-redeemable preference shares and Capital Adequacy Ratio is the ratio of the capital (Tier 1 equity, Tier 1 or Tier 2) to its risk weighted assets, which shows the bank's capital relative to its risk, with a lower percentage being more favourable. A bank may take more risk in order to increase its return on equity. The bank with the lowest Capital Adequacy Ratio (Tier 1) is DBS, which had a ratio of 13.1%, while UOB and OCBC had ratios of 13.9% and 13.8% respectively.

(I may be wrong on some of these points, please correct me)