Overseas Chinese Banking Corporation (OCBC Bank)

[felixleong]

Hi guys,

What price would you all pay for ocbc? If I simply use P/B ratio of 1, it means I will only buy when it reaches 8.33..

However, historically, ocbc's P/B ratio was never below 1 (if my research is right)..

Will a similar episode happen to DBS when it took over Dao Heng in 2001?

Just a newbie wanting to learn

Normally for valuing banks, investors look at PE and PB
Banks normally trade at 1 times book or less only during crisis, which is rare (once in a decade kinda like asia financial crisis or the recent global financial crisis)

For a traditional saving and loan company, you might wanna pay just 1 times book value or less.

However for a bank like OCBC, it generates a lot of income from businesses such as asset management (Bank of Singapore) and Insurance (Great Eastern) that do not use much assets, only half its income comes from traditional lending (borrow $$ from depositers and lend to SMEs or consumers) which is asset heavy.

Historically Banks trades close to the valuation of the STI which is about 15 times earnings (do note that 1/3 of the index consists of our local banks)

With a growth rate of 10% and a yield of 3-4%, 15 earnings could be a fair price for a bank like OCBC, at 12 times would be a small margin of safety and at 10 times earnings or less its a steal for a solid blue chip.

Also with the new Basel III ruling, banks are at least 2 to 3 times safer than they were before 2007 (but it doesn't mean they cant go down under), yet Mr market now is pricing banks at only 10-12 times earnings.

Cheers ^^