Singapore’s listed banks are the epitome of what a banking stock should look like – stable yet plentiful of growth, on top of prudent capital management and ever growing dividends and net asset value per share.
While the near-term prospects of SG banks may be affected by change in interest rates regime, it might alter the short-term fair value.
Those that follow the macroeconomic and interest rates news will know what I am referring to. As interest rates start tapering down, banking stocks might not be laughing their way to the bank anymore.
So, for a relatively SG Bank perma-bull, what do I think?
Dissecting DBS, OCBC and UOB latest results
Since all three banks have reported their latest set of results, I guess its fair to take a look at all 3 banks’ latest performance
| 1H Key Results | DBS | OCBC | UOB | ||
| Total Income (S$m) | 11,637 (+5% YoY) | 7,202 (-1% YoY) | 7,121 (+2% YoY) | ||
| – Net interest income (S$m) | 7,344 (-1% YoY) | 4,628 (-5% YoY) | 4,745 (-) | ||
| – Non-interest income (S$m) | 3,512 (+10% YoY) | 2,574 (+8% YoY) | 2,377 (+6% YoY) | ||
| Net profit (S$m) | 5,721 (-) | 3,699 (-6% YoY) | 2,828 (-3% YoY) | ||
| Dividends per share (S$) | 1.2 (+11% – excluding 0.3 capital return) | 0.41 (-6.8% YoY) | 0.85 (-3% YoY) | ||
| Dividend payout ratio % | 37% | 50% | 50% |
Across the top line, DBS raked in a growth of +5% YoY, UOB +2% YoY while OCBC surprised with a -1% YoY decline. OCBC’s overall total income growth contracted mainly due to a -5% YoY drop in its net interest income, while DBS is down -1% YoY while UOB remained flat.
Non-interest income remains a strong and growing pillar, as all 3 banks reported strong growth in this segment. DBS came in with the highest growth at +10% YoY, with OCBC second with +8% YoY and UOB behind at +6% YoY.
Net profit level wise, DBS came in flat, with UOB contracting -3% YoY and OCBC -6% YoY.
All three banks remain generous yet prudent dividend payers. But the stark difference is that DBS increased its 1H’25 dividends by +11% YoY to $1.2 per share, at a payout ratio of 37%. To take note, this does not include the promised capital return of S$0.3 per share. As for the remaining 2 banks, dividend payout is 50%, but DPU for 1H’25 slid down.
Uh oh…
The culprit – loan growth or NIM compression?
Is there a potential chip in the banking’s stock armour? What led to the sluggish net interest income contraction?
A quick check on loan growth shows that all three banks are still growing their loans like clockwork. But keen eyed observers might argue that the rates have started slowing down.
The culprit lies with the Net interest margin (NIM) compression. Yes, we might not have hit the low interest rate levels just yet, but rates have clearly started tapering off from their peak.
All 3 banks exhibit similar drop in NIM as loan yields decrease faster than the reduction in deposit costs. This will ultimately squeeze the margin between interest earned on loans and interest paid on deposits. The high-interest savings initiative are also becoming less lucrative or harder to achieve.
UOB’s NIM compression is the least, down 16 bps YoY. DBS has the highest NIM among the 3 banks, at 2.61%, though it dipped 19 bps YoY. OCBC suffered the hardest hit – its NIM is below 2%, dropping by a whopping 25 bps YoY.
Is this enough to end the SG banking stock bull run?
The bright spots of Singapore Banks
Yes, there will be short term implications of Singapore banks’ net interest income, but this should normalise after 2 quarters. And a lower interest rate would stimulate better loan growth, so long as overall economic growth remains vibrant.
Putting that aside, there are still plenty of bright spots in all three Singapore banks. Non-interest income, which is made up by fees and wealth management, are still experiencing exhilarating growths. Singapore as a financial hub of not only Southeast Asia but also Asia would continue to be a strong catalyst for banks having a presence in Singapore.
All three listed Singapore banks have solid capital position and prudent cost management. Although the retail investors may not have the financial muscle and capacity to drill down near-term results, but the long term prospects and health of the three banks remain intact.
Valuation
Singapore banks trading at all-time-high (ATH) prices will mean that the traditional price to book ratio will be showing ridiculous figures.
DBS is trading at a trailing P/B ratio of a ridiculous 2.13x. UOB and OCBC follow at a P/B ratio of 1.25x and 1.3x respectively. From this perspective, overpaying cash to obtain ownership of a business predominantly made up of cash and assets does not make one a shrewd investor.
That said, as Singapore banks are earning powerhouses, I feel it is fair to value these banks based on their earning capabilities and dividend growth.
All 3 banks are the bedrock foundation of the STI, and are also the main reason of the STI’s outperformance. With growing net profits and earnings per share, it is surprising to see all 3 banks trading below a P/E of 15x. DBS’ latest P/E is close to 13x, while UOB and OCBC are just above 10x.
And looking at relative valuation historically, all three banks are just trading either slightly below or above their historical mean P/E of 11-12 times.
Dividend yield wise, all three banks are also trading above 4.5% dividend yield valuation. If dividends remain as it is, even without growth or increasing payout ratio, all three banks are still trading at very fair valuation, despite share prices at all-time highs.
Verdict – It depends on your holding horizon
There are those who opine that Singapore banks are already trading at rich valuation, with more downside than upsides. They are most likely correct, as the valuations and near term macroeconomic and interest rate regimes do stack up against them.
That said, does that mean it’s time to sell, and there is totally no way for Singapore banks to grow more?
The current prices may suggest SG banks are trading at a higher premium, and it may not be wise to add or go long for the short term.
But zooming out, Singapore banking stocks have a solid track record of delivering market-beating shareholder returns. For long-term investors, the odds of underperformance are slim, as long as the general fundamentals remain intact.
It might not be a smart choice to add or go long now, but for those who are already vested for the long run, I wish everyone diamond hands, and abundance of dividends.
p.s. if you want to learn how to analyse and find the best stocks to buy, Alvin shares our strategy at this live webinar.
