The banking sector has been looked upon favourably recently as analysts are expecting the synchronised recovery in the global economy would stimulate stronger growth in the sector.  In this article, we will be examining the general outlook of the banking sector, as well as analysing the relative strengths of the three major banks in Singapore.

The general outlook in the banking sector is positive with strong growth in domestic loans of 6.8 percent year-on-year for October 2017. In particular, domestic business loans grew by 9 percent due to strong demand from property related businesses. Similarly, car loans saw a 4.5 percent increase which is the highest growth rate since the start of 2013.

Analysts from UOB-Kay Hian examined the productivity and cost efficiency of the three local banks and how each would perform in 2018.

A Comparison Of Productivity

In terms of productivity, DBS Group Holdings (DBS) emerged as the winner with the most productive workforce, as income per employee stood at $538,805 for 3Q17. This was notably above the performance of the other two banks, with Oversea-Chinese Banking Corporation (OCBC) standing at $323,465 and United Overseas Bank (UOB) at $361,289.

This is coupled with the fact that DBS has a significantly much higher staff cost per employee at $120,830, compared to $83,333 for OCBC and $87,620 for UOB. This shows that DBS’s high productivity comes at a higher cost for the bank, but it may very well be worthwhile given that staff cost only took up 56 percent of operating expenses – still far lower than that of OCBC’s 61.6 percent.

Overall, UOB-Kay Hian maintained its “Overweight” call on the banking sector as they expect the robust global economic growth combined with US-led deregulation will help will fuel performance of the banks.


DBS’s total income grew at a faster rate and recorded an increase of 1.8 percent in 9M17, although that figure will come down to -2.2 percent if one-off $350 million divestment gain from PwC building is excluded. Insourcing for the bank saw a tremendous increase over the years, rising to 85 percent in 2017 from 15 percent in 2009 as DBS builds up on its own IT infrastructure for greater control and flexibility

Despite an increase in total headcount, DBS still has the smallest – yet most productive – workforce amongst the three local banks. Overall, UOB-Kay Hian maintains a “Buy” call on the bank with a target price of $26.10. Currently, DBS is trading at $24.86 per share, implying that investors are looking at another 5 percent potential upside.


The consolidation of Wing Hang Bank in 3Q14 resulted in an initial drag on OCBC’s Cost-to-Income Ratio (CIR, a measure of cost efficiency). Since then, OCBC’S CIR improved and remained unchanged at 42.3 percent in 9M17. This was attributable to an improvement in the efficiency of its Indonesian unit Bank OCBC NISP, which saw a 11.4 percent decrease in CIR to 44.1 percent.

Overall, despite having the largest headcount (due to Wing Hang Bank consolidation) amongst the 3 banks, OCBC takes the lead in terms of cost-efficiency, having also trimmed headcount by 2.1 percent in 9M17.  UOB-Kay Hian has a “Buy” call on OCBC with a target price of $13.56, representing a potential gain of 10.1 percent. OCBC is currently trading at $12.32 per share.


UOB’s expenses grew faster than its income for the past FY15 and FY16, resulting in a deterioration of CIR. The trend reversed in 9M17 as income picked up and grew 8.5 percent, although expense growth of 6.7 percent was still faster than peers (DBS saw a 0.6 percent increase and OCBC saw a 5.7 percent increase in expense growth).

IT-related expense grew at double-digits, at a compound annual growth rate of 21.6 percent from FY14 to FY16. Compared to DBS (17 percent), IT-related expense for UOB was still low at just 9 percent of operating costs. This suggests that increments in operating costs in recent years are probably due to ramp up in IT-related capex.

That said, rising interest rate spreads, rising bond yields and improving asset quality from the oil and gas sector should help UOB in terms of earnings growth for 2018. Phillip Securities maintained an “Accumulate” call on UOB, assigning a fair price of $25.22. UOB is now trading at $25.89.

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