OCBC (SGX: 039)

OCBC (SGX: 039)

The global economy has taken a beating in mid 2015 and the effects are just worsening. Banks aren't faring well either - share price wise. I believe this is a great time to highlight the fact that the market is always a manic depressive guy that pushes prices far too low to justify. Let's see what does the low now means.

Note: I ran through the 8 years of annual reports myself and the numbers I used were from the reports, thus it might be different from values reported elsewhere such as websites. Adjustments were also done based on my own judgement. Some values which might seem doubtful or raises further clarification were checked with notes to financial statements, and not all clarifications are stated here.

*Since formatting table in blog posts is extremely tedious I'll attach a excel doc for referring instead. Please refer to it should you need data to understand what some paragraphs are talking about.

Link to excel: https://drive.google.com/file/d/0B1fcD_lJpW6hcDhHOEZ4ZjlJR2M/view?usp=sharing


1. Financials
Revenue growth has always been growing at a solid pace since 2008 to 2014, at over 8% compounded annual growth rate (CAGR). This is also coupled with a healthy level of operating expenses, at about 40.59% throughout the 8 years. It has not grown or shrank by a lot. Given the fact that this is a service/financial industry with little to no manufacturing, upstream or downstream processing, operating expenses can be assumed to be relatively stable.

However, revenue by itself does not really impact shareholders in terms of valuation as for investors, we are more concerned about the money that are attributable to us. Let's take a look at the final picture or as what they call it in the annual reports 'Net Profit attributable to ordinary equity holders of the Bank after preference dividends' (Net profit)

I am not a fan of companies issuing preference shares, since it is usually something that is done when a company is in a more desperate need of funding. However, I am quite new towards evaluating finance companies and thus this will not effect my judgement whatsoever.

Net profit increased even more on a compounded annual growth rate basis, having a 10.6% growth rate, with the CAGR of EPS at 7.16%. These numbers are quite impressive given the fact that banks do not come up with a breakthrough in technology or new scientific discovery that can boost sales greatly. I believe this would be creditable to good management and banking policies. Proper risk evaluation by the bank would also prevent the occurrence of non performing loans and increase growth.

Net profit margin has also been rising steadily from 38.19% in 2008 to 45.39% in 2014. This means that more and more of the bank's revenue are attributable to shareholders, which is good.

Dividends payout has been very mild since the financial crisis of 2008. The bank seems to be working towards lowering their payout margin before increasing dividends. This could also be a way to increase their cushion should economic downturn occurs so they do not have to lower their dividend payout (and maybe even increase it). Dividends payout has been increasing consistently throughout the years, although there isn't a increase every year.

However, given the decreasing payout margin, the yield is standing at quite a decent rate of 3.44%, averaged from 2009-2014. The yield from 2008 is not considered since the super low share price skewed the yield up a lot. Since 2008's yield of 5.79%, the dividend yield has not reach 4%, or barely even 3.5%, from 2009-2014. Thus a yield of 4.53% with the current share price of 7.95 could be a good reason to buy in. This is assuming the dividends does not drop from the previous year's $0.36, although I strongly believe it won't.

One must also take note that OCBC is constantly issuing shares throughout the year, either from scrip dividends scheme or just rights issuing, and that the increase of shares has a CAGR of 3.6%. Should net profit growth slows from the 10.6% (a rather high number to maintain), the continued issuance of shares at this rate could drastically impact shareholders growth. A drop to net profit growth to 5% annually, a reasonable rate, would bring EPS growth to merely 1.x%, which is very little. I believe the management will handle this matter properly though, as during the crisis of 2008, very little new shares were issued.

2. Balance sheets and ratios

Assets and liabilities have been growing at a extremely fast rate throughout the years. In financial companies assets and liabilities are more intricately related than typical industries, this is because the bottom line is the majority of both the sections are money. Unlike typical industries where assets could be inventory, PPE, patents etc. and liabilities payables, debts, rent etc,. banks are just mostly dealing with money. Therefore as assets rise liabilities are definitely rising with it.

It is then good to note that the bank's debt ratio has always been consistent at 0.9, although there is a slight upwards trend since 2008.

Net assets has been rising steadily at a CAGR of 8.8%, bringing their net assets value (NAV) to 8.844 as of 3Q2015, as compared to their share price of 7.95. This value is extremely critical as the bank's NAV has never been higher than its share price since 2008.

OCBC's Price/Nav has been consistently above 1 (avg 1.2) from 2009 to 2014. With the recent crash in the market, it's Price/Nav has fallen to 0.90. In term of Graham's net-nets, this could be considered undervalued. However, should we apply Graham's valuation of 0.5x receivables, it would skew the bank's net-nets to catastrophically low levels, which is unrealistic, since most of the bank's assets are from loans receivables. Since the bank's NPL percentage has always been below 1%, with 2014's 0.6%, even with the slight increase of NPLs in the O&G sector, net receivables by the bank wouldn't seem to be affected much.

The bank's historic price/earnings ratio (P/E) has seen an average of 13 from 2009-2014, with a decreasing trend of 14.9 in 2009 to 11.03 in 2014. With the recent crash, the P/E has dropped as low as 8.39, even lower than 2008's 8.88.

In 2008, the P/E*P/B was at 7.18 and its 7.53 now, not much further away. Although I feel that it is nigh impossible, for share prices to drop to it's 2008 levels of 4.84, would mean nearly a halved valuation of the company back then. If you don't understand this portion its fine. Basically I am saying the prices now are just slightly more expensive then 2008's.

3. Conclusion 

In conclusion, should you seek to get income from dividend yield, this is quite a opportune time to pick up some of OCBC shares, as discussed in part 1.

Also, should you seek to get share price appreciation, the NAV is only 90% of it's share price right now, which could also prove to be a bargain, as discussed in part 2. Please note that however, share price appreciation is something that even the greatest of minds cannot confirm it's occurrence nor the time it will take to occur, and these can only be viewed as educated guesses and predictions.

I will pick up OCBC shares should I verify that no other banks in the similar industry displays a better valuation (to be done).

Link to excel: https://drive.google.com/file/d/0B1fcD_lJpW6hcDhHOEZ4ZjlJR2M/view?usp=sharing

Disclaimer: This article was written with no intention to solicit funds, any kinds of investments or benefits. I do not bear liabilities should any losses arise from actions made from reading this article nor are entitled to any profits thus risen. I do not represent any company or organization but myself in the writing of this article. Should there are any inquiries or invitation of discussion feel free to contact me in any possible way (facebook, comments, email: Bryan_rong@hotmail.com etc.)