Remember my article way back during early this year predicting that Singapore banks might continue to huat?
And remember the coverage back in Jul’24 suggesting that there could be more legs for DBS Ltd (SGX: D05) to run?
Fast forward to the end of 2024, and we are now looking at an impressive YTD gain of 40% for DBS.
I thought it would be interesting to relook into this, and those who have been following this might be wondering if I have finally switched to the bear camp for SG’s banking stocks.
Now before we jump straight into the valuation of DBS, I think it is worthwhile to understand why DBS has always been trading at a premium valuation compared to it’s peers – United Overseas Bank Ltd (SGX: U11) & Overseas Chinese Banking Corporation (SGX: O39)
Let’s unpack the outperformance of DBS vs UOB & OCBC
All 3 SG banks are on track to beat the S&P500 by a mile, with dividends factored in.
Those with keen eyes or avid followers of the share prices would notice the outperformance of DBS vs its peers.
Why is DBS’ total shareholders’ returns for 2024 outpacing its peers?
Superior growth and profitability
All 3 Singapore banks’ continue to demonstrate solid growth with no signs of slowing down. But when comparing the 3 of them side by side, DBS, although the largest, still found it possible to outpace its peers in both total income and net profits.
Both 3 banks recorded total income growth of +11% for Q3’24. But looking at 9M’24 wise, DBS is well ahead with an +11% YoY growth, with UOB and OCBC only managing +3% and +8% YoY respectively.
Net profit wise, DBS also recorded a YoY growth of +11%, far better than its peers who recorded +5% and +9% YoY.
Cost management, capital prudence and dividends
When it comes to cost management, DBS shows that it can be one of the most efficient bank. Its cost-to-income ratio (CIR) stands at 39%, only slightly higher than OCBC which recorded a Q3’25 CIR of 38.5%.
And in terms of capital prudence, looking at the latest CET-1, DBS has the highest CET-1 ratio at 17.2%, up +310 bps YoY. It easily beat out UOB and OCBC, which also has a remarkable CET-1 ratio of more than 15%.
Lastly, in terms of dividends, for the latest 9M’24, DBS’ dividends is +28.5% higher than its 9M’23, with UOB and OCBC only managing to grow their dividends at 7.5-8% YoY.
DBS has proven to be the better bank fundamentally, and that has fundamentally reflected into the share price performances of its shareholders’ returns, which is much higher than UOB & OCBC.
Are SG banks overvalued? Or still worth buying?
Many of you might be wondering then, with this year’s outperformance, are SG banks overvalued? Will I continue my bullish view on SG banks?
I got to admit upfront, valuations are rich now based on my own perspective. But I guess its fair to let the fundamentals speak for themselves.
Dividend yield wise, all 3 banks are trading at at least 4.8% trailing yield. This yield is still enticing for income investors, and is just a slight premium over the historical 5-year dividend yield.
SG banks have been and will be solid, as they are riding on Singapore’s status as the financial hub for Asia. I’d still prefer the SG banks even more than its counterparts in the US, Australia and Malaysia.
And with all 3 banks historically having a dividend payout ratio of 50% for the past few years, there is more room for higher payouts. With business flourishing and earnings increasing, SG banks could still increase its payout ratio.
P/E wise, all 3 banks are trading around their mean P/E ratio, around 10-11x P/E. Yes, those with keen eyes would notice that prices expanded at a faster rate post August’24, but over a 5-year horizon, all 3 banks are neither too pricey nor cheap.
Only when it comes to P/B ratio, we start to see SG banks trading at rich valuations. UOB and OCBC are trading at 1.3x P/B while DBS is almost hitting 2.0x!
You want to know what I am thinking, right?
For me, if a company or business is churning out profits, it should be valued on its earnings potential and capability, rather than the amount of assets it holds. Granted banks are made up of cash, and it’s wise to avoid overpaying cash for cash. But on the flip side, getting too ensnared by that means we will continue to lose out on earnings and growth potential of SG banks.
Those who are holding, would continue to find solace and reasons to hold. Those looking to top up, might want to take advantage of market volatility to aim for a better price. But I don’t think there are many in the bear camps betting on the slowdown of SG banks.
SG banks 2025 outlook?
How will 2025 be? Unpredictable and uncharted water, as always.
But from the macroeconomic lenses, at least a few are in progress and certain.
With interest rates predicted to be lower for 2025, this could spur loan growth. There might be some NIM compression, but over a longer time frame, SG banks should be able to stabilise their NIM as rate cuts slowly transpire.
On the flip side, the markets have reacted to the latest Federal Reserve announcements that rate cuts would not be as frequent as previously anticipated. A higher interest rate environment might be unfavourable to the stock markets, but could still help banks boost its NIM and achieve better interest income. DBS has previously mentioned that a tighter US monetary policy is better for its upcoming fiscal year.
My verdict
It is really difficult to come up with a rational thesis to go against the SG banks fundamentally. Yes valuations are at a premium now, but that does not mean they have stopped growing their earnings and dividends.
As I have mentioned before, the chance to buy SG banks at dirt cheap valuation is when there is a crash. And when a crash really does happen, how many would have the guts to pull the trigger, or have capital set aside for that particular day and time when it happens?
One lot of SG bank shares requires hefty upfront capital as well. Who knows, if a stock split does happen to provide more trading liquidity, share prices could even go up more (remember Nvidia?)
Despite the current rich valuations it is trading at, I remain a long term perma-bull on all 3 SG banks.
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