Saturday, November 22, 2008

How to See if a Bank might fail - Example: DBS Singapore

With all the gloom and doom about bank failures and with Citigroup going to $3+ dollars, what the heck is happening to the world! Let's look at a recently popularised ( its been around for sometime actually)ratio called the Texas ratio to see if a bank has a chance of failure. Before you read further, please take note that banks are one of the hardest entities to value or analyse. Admittedly, SGDividends are not experts at it. We can only try, using some logic and common sense.

The Texas ratio was developed as an early warning system to identify potential problem banks. It was originally applied to banks in Texas in the 1980s and proved useful for New England banks in the early 1990s. Below is a good video by CBS about this ratio. Apparently, its quite reliable.

Definition: The Texas ratio takes the amount of a bank's non-performing assets and loans and divides this number by the firm's tangible capital equity plus its loan loss reserve. A ratio of more than 100% (or 1:1) is considered a warning sign.

So what is a non-performing loan (NPL or as DBS calls it NPA)? A loan becomes non-performing after being in default for three months, but this can depend on the contract terms.

So let's look at our dear DBS ( yes the one embroiled in the High Notes case, the one who fired 900 employees without consulting the unions, the ones who "lost" clients safe deposit boxes).
From the most recent financial statements released in Nov 2008, DBS reported S$2,054 million non-performing loans. See below.
The non-performing loan amounts have to be divided by TANGIBLE capital equity PLUS loan loss reserve. The tangible capital equity is calculated as total equity ( S$24,333 million) minus Goodwill on consolidation ( S$5,847 million) which is equals S$18,486 million. See below.

Therefore, the Texas Ratio ( sounds like game Texas Hold'em!) = S$2054 / S$18,486 = 0.111=11%. ( we did not mention about the loss reserve as we can't find it and we suspect its been accounted for in the S$18,486 figure. )

Since the Texas Ratio of 11% is way lesser than 100%. DBS is considered safe. Can you sleep well tonight?

Important: The objective of the articles in this blog is to set you thinking about the company before you invest your hard-earned money. Do not invest solely based on this article. Unlike House or Instituitional Analysts who have to maintain relations with corporations due to investment banking relations, generating commissions,e.t.c, SGDividends say things as it is, factually. Unlike Analyst who have to be "uptight" and "cheem", we make it simplified and cheapskate. -The Vigilante Investor, SGDividends Team


  1. No need for such analysis. Just look at the capital adequacy ratio (tier 1), which is disclosed.

  2. Yup..thats the common way of looking at it. We brought the texas ratio up as it is not so common to use it...popularised recently.


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