Weighing the 3 local banks -- DBS, OCBC and UOB

With the three local banks about to release their full year financial results next week, I decided to read through the 9M14 report to re-look their positions with the new developments in US, mainly in order of priority:

1. Obama's proposed budget to increase corporate tax rates and foreign income tax rates, to reduce debt;
2. Ceasure of Quantitative Easing (QE); and
3. Fed's committment to increase interest rates "realistically", which many people believe to be in the second half of 2015.

I would not have been interested to look through the reports had it not been for Obama's announcement this week, so my focus is on the US currency and loan interest income, which I believe the three local banks share price will react to. Of course, US corporate tax rates hikes may not get the support from the Republicans but generally, I believe the businessmen are smarter than politicians to know who to support and what to believe in. The convergence of the three events will likely guide the USD to appreciate against the SGD.

Data had been extracted from individual bank's 9M14 financial reports. 

The focus is to ascertain the exposure to USD loans and reliance on loans as income, so that we can better infer whether income will increase or decrease when any of the two events occur:

• USD appreciates against the SGD (globally)
• SIBOR interbank lending rates increase (locally)

First, I look for Interest Income, which in lay man terms mean, how much I earn from my customers by lending money to them. This is determined by the interest rates the bank charges its customers for the loan.

DBS has the largest proportion of Interest Income at 82.63%. OCBC and UOB have a much smaller absolute and percentage amount compared with DBS. This potentially could give DBS a windfall if interest rates were to increase. On the whole, DBS' interest rates for income-bearing assets (not shown in this diagram but available in the financial report) were the lowest (2.38%) among the three (2.69% for OCBC and UOB), which gives DBS more leeway to increase rates without hurting their competitive edge. Income-bearing assets include what we understand in lay man terms as loans.

Second, I look for Customer loans by currency, which is the apportionment of loans based on the currency the loan had been given. This is important if we want to infer the income generation ability when one currency appreciates significantly over another.

DBS has the largest proportion and absolute amount of USD loans. UOB has the least exposure, hence will least likely be positively/negatively affected by USD exchange rates. Based on the distribution, OCBC's spread of currency looks more diversified, which implies less interest income fluctuations due to currency. DBS' distribution of a near 50-50 distribution of USD and SGD loans suggests a strategy of hugging both currencies tightly so that the appreciation of one and depreciation of the other will cancel the effects of each other. On the whole, no one bank is superior over another in this aspect mainly because all three banks report their earnings in SGD. For Singapore companies that report their earnings in USD, this could play a bigger role.

Third, I look for cost to income ratio, which is a way of telling the shareholder how much it costs the company to earn every $1. All three banks are close, but OCBC spent the least. At 39.5%, in lay man terms, OCBC spent 39.5 cents to earn $1.

The writer owns units of DBS shares at the time of writing.

References:

1. DBS 9M14
2. UOB 9M14
3. OCBC 9M14