FY23 has been a year of high interest rates and a relatively robust economy. This has made the banking industry one of the clear winners, with a strong loan book and relatively high net interest margin driving record revenue growth and profits for the banks.
| 9M24 | DBS | OCBC | UOB |
| Last share price ($) | $42 | $16 | $36.4 |
| Market Cap ($’bn) | $119 | $72 | $61 |
| Revenue Growth (% YoY) | 11% | 8% | 3% |
| Net Profit increase (% YoY) | 11% | 9% | 5% |
| Cost/income ratio (%) | 38.7% | 37.8% | 41.7% |
| Net interest margin (%) | 2.13(-0.03)% | 2.22 (-0.06)% | 2.04 (-0.08)% |
| CASA ratio (%) | 52% | 48.4% | 53.6% |
| Non performing loans (%) | 1.0% | 0.9% | 1.5% |
| Capital adequacy ratio (CET-1) (%) | 17.2% | 17.2% | 15.5% |
| Earnings per share ($) | $4.1 | $1.74 | $3.53 |
| NAV per share ($) | $22.81 | $12.43 | $27.42 |
| Dividend per share ($) | $2.16 | $0.88 | $1.76 |
| Dividend Yield (%) | 5.1% | 5.5% | 5.0% |
| Return on equity (%) | 18.8% | 14.4% | 14.3% |
| P/B ratio (times) | 1.84x | 1.29x | 1.33x |
| P/E ratio (times) | 10.2x | 9.2x | 10.3x |
Robust 9M2024 performance
The three banks have continued their growth trajectory, delivering positive revenue growth of between 3% and 11% and a corresponding net profit increase of between 5% and 11%. Revenue and Net profit increase was largely in line which indicates that the cost to income ratio was maintained.
This 9M24 performance marks a slower year after a strong FY23, which set a high baseline as all three banks delivered revenue increase of about 20% and a corresponding net profit increase of about 26%.
This moderation isn’t unexpected, as we’ve entered a slightly lower interest rate environment as compared to FY23, allowing economic growth year on year to be somewhat stable. This meant that the entire business franchise delivered healthy performances across the Banks’ key markets and bolstered the Banks’ core profitability.
Unlike FY23 where the front half was much stronger than the back half as the toll of higher interest rates started to hit the economy (given the last Fed hike was in Jul 2022), Quarter on Quarter performance FY24 has been somewhat stable across all three quarters as conditions remained largely the same.
Net interest margin begins to fall
All three banks record substantial net interest margin (NIM) growth, backed by a high current account-savings account (CASA) ratio. In Singapore, the banks maintain a CASA ratio of around 50%, providing them with a substantial pool of cheap funds.
The CASA ratio measures the proportion of a bank’s total deposits that are held in the form of current or savings account. Given the low or zero interest paid on such accounts, a high ratio is usually good for the bank.
Interest rates have started to come down and we can see it being reflected in lower NIM. The Fed has began its rate cut cycle and have cut a total of 75bps in two consecutive meetings.
Strong capital ratios
In Singapore, the three banks demonstrate strong core profitability and are currently distributing around 50% of their earnings as dividends.
The banks all have Common Equity Tier 1 (CET-1) ratios that are significantly higher than Basel III requirements and have seen their ratios increase as capital accumulates.
DBS rose to a new high after it announced a $3 billion share buyback programme – equivalent to approximately 25% of their annual profit, or one quarter’s profit. When taking reference to the current share price, DBS’s share buyback amounts to about 2.5% of outstanding shares, not small but at the same time not significant when comparing to the size of share buyback programmes of many other well known companies.
All three banks are digesting previous acquisitions, and OCBC is expected to carry out more acquisitions as its balance sheet has the most capacity for deals.
For UOB, allowance for credit and other losses grew 29%, as total credit costs on loans grew to 34 basis points. UOB said this was mainly due to “friction issues” among its Thai retail customers following the operational merger of Citi the prior quarter. The bank, however, said it expects this to normalise in the next two quarters.
DBS completed the acquisition of Citigroup Taiwan, making it Taiwan’s largest foreign bank by assets and have said in a comment in the previous quarter that it is looking to make bolt-on deals that would support its geographic and business strategy, rather than major game-changing ones.
OCBC just completed the merger with PT Bank Commonwealth in Sept 2024 and shareholders may see similar “friction issues” in the near term.
Outlook for 2025
With Trump newly elected, the outlook is uncertain until the dust settles. There is a view that his policies will lead to higher inflation and will cause the interest rate trajectory to rise compared to expectations just a month ago. There are also worries about geopolitical uncertainty. All of which could lead to weaker economic conditions.
The three banks have all expressed concerns about potential volatilities arising from uncertain geopolitical conditions. However, they remain confidence in their own resilience and long-term prospects of the key markets in which they operate. The usual narrative continues to be for global uncertainty balanced by ASEAN strength, underpinned by strong investment flows, especially into the manufacturing sector as companies reconfigure their supply chains.
However, they are not all reading from the same script as there are some diverging opinions. OCBC is looking to prepare for a lower interest rate environment while DBS expects rates may stay higher for longer due to potential inflation concerns.
Regardless, should economic conditions weaken, it is unlikely that the banks will be able to maintain the current somewhat high NIM spread.
REIT or Bank?
In Trump’s first presidency, he pressured the Feds to lower rates which mean that should he utilise the same playbook, it would mean better times ahead for REITs, while Banks would be squeezed.
But we know that this was not how the markets reacted upon confirmation of his second presidency. Instead, Banks across the world rallied while REITs fell.
The three Banks used to yield between 6.0% to 6.4% when they announced FY23 earnings and now carry yields of only between 5.0% to 5.5%.
Meanwhile, REITs have fallen substantially in recent times due to shifts in fundamentals and continued to do so following Trump’s re-election, reflecting expectations of higher for longer rates.
This means that REIT is now a contrarian play, while the Bank is a momentum play. Fundamentally, the three Singapore Banks are coming off stronger than before, while REITs in many subsectors are impacted by a trifecta of high interest rates, higher vacancy rates and higher property costs.
While REITs do look like value plays today, with yields higher than before, they do need to overcome the trifecta of issues and deliver higher distributions to shareholders.
In evaluating the options, considering both valuation and dividend yield, we think that OCBC is still the standout candidate. Its favourable combination of a lower valuation and a high dividend yield offers an attractive proposition, aligning well with those seeking both affordability and income potential.
OCBC also continue to have the best key metrics such as the cost-to-income ratio, net interest margin, non-performing loan ratio and capital adequacy ratio.
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