Earnings season is here once again, and all three Singapore banks have released their Q1 2023 results.
Let’s have a review of them and see which bank is the fairest to buy now.
Local banks reported strong earnings!
To begin, here is a summary of key metrics for the three banks, with green indicating the best performer and red the worst:
| DBS | OCBC | UOB | |
|---|---|---|---|
| Market Cap | 81.8B | 55.5B | 47.3B |
| Revenue Growth (YoY) | 34% | 27% | 49% |
| Net Profit Growth (YoY) | 43% | 39% | 74% |
| Dividend Yield | 4.92%* | 5.5% | 4.79% |
| Net Interest Margin | 2.12% | 2.3% | 2.14% |
| NIM Growth | 7 bp | -1 bp | -8 bp |
| Non Performing Loans | 1.1% | 1.1% | 1.6% |
| Capital Adequacy Ratio | 14.4% | 15.9% | 14% |
| Return on Equity | 18.6% | 14.7% | 14.9% |
| Price to Book | 1.45 | 1.04 | 1.17 |
| Price to Book Median (5 years) | 1.34 | 1.07 | 1.14 |
| Remarks | *Exclude special dividend |
As you can see, all three local banks did well, with Q1 2023 revenue increasing as the net interest margin increased compared to a year ago. Moving down to the bottom line, the increase became even more prominent as the banks managed their expenses well, resulting in slower expense increases and hence higher profits.
In fact, UOB stands out here with a 74% YoY increase in net profit, driven by well-managed cost expenses and customer-related treasury income reaching new highs.
Other reasons for UOB’s better performance could also be its acquisition of Citibank’s consumer businesses in four Southeast Asian markets for about S$5 billion ($3.71 billion), which boosted its portfolio.
This would be further improved moving forward, following the completion of Citigroup’s Indonesian consumer banking business by the end of 2023.
All in all the banks did well. They have all shown sustained business momentum and resilient asset quality, with the non-performing loans ratio remaining low, capital adequacy ratio remaining high, and return on equity continuing to show efficient cost management.
Net interest margin peaking!
That said, things are not so bright.
While the recent results were impressive, the net interest margin seems to have reached its peak.
In fact, except for DBS, both OCBC, and UOB have already experienced a decline in their net interest margin by -1bp and -8bp, respectively.
Looking at the net interest income, all three banks have shown a decline from the previous quarter, indicating that the peak has been reached.
That said, it is unlikely that the net interest income will drop significantly since interest rates are expected to remain high until the end of the year before the Fed begins to reduce them. In addition, there is potential for support from customers refinancing their mortgages and loans with high-interest rates.
Nonetheless, it is unlikely that we will see the same spectacular growth in net interest income as before.
DBS faces additional regulatory capital requirements after digital disruption
Since we are talking about banks, another piece of news worth mentioning pertains to the recent digital disruption faced by DBS on 29th March, which caused widespread disruption of its banking services.
In response, the Monetary Authority of Singapore has imposed an additional capital requirement on DBS to the tune of 1.8 times its risk-weighted assets for operational risk, amounting to around $1.6 billion in total additional regulatory capital.
This may seem like a significant sum, but the latest regulatory action is only expected to impact DBS’s common equity tier 1 capital ratio by 0.3%, reducing it from 14.4% to 14.1%.
Of course, while this may not significantly impact the bank, repeated occurrences of such disruptions could erode customer trust, which is crucial in the current climate.
Ongoing Banking Crisis
On the topic of trust, let’s discuss the ongoing banking crisis in other countries. Following the collapse of several banks, including Silicon Valley Bank, Signature Bank, and Credit Suisse, the situation was thought to be under control. However, the recent collapse of the First Republic suggests that the crisis is far from over, and more banks may continue to struggle.
As investors in banks, it is essential to monitor this situation closely. Fortunately, most of these failures are happening to smaller banks, with customers choosing to put their money in more reputable and larger banks.
This includes our local banks, which have benefited from increased deposits due to risk aversion in the market. DBS CEO Mr. Gupta has clarified that being located in a triple-A-rated country with a strong regulator and with Temasek as an anchor investor, DBS is likely to benefit from risk aversion in the market.
While there is still a risk of a bank run, it is relatively low for our local banks, providing some peace of mind for investors.
Singapore Banks Valuation
Regarding bank valuation, in light of recent events, bank prices have dropped slightly. This resulted in a more reasonable P/B ratio as compared to a few months ago, so if you are considering one to buy, you may find them more attractive now.
Making a comparison, DBS remains the most expensive both historically and when compared to its peers, while OCBC is the cheapest among the three.
DBS Price to earnings (1Q23)
UOB Price to earnings (1Q23)
OCBC Price to earnings (1Q23)
That said, it’s important to note that this doesn’t necessarily mean that OCBC is the best choice, as historical trends show that DBS has typically traded at a premium and OCBC has been the cheapest. Thus, using this metric alone may not be the most reliable way to make a decision on which bank to invest in.
Singapore Banks Dividend
Another way to evaluate is by comparing dividend yields.
DBS is the only bank that pays quarterly dividends, and their latest dividend of 42 cents per share yields around 4.92% (excluding special dividends)
This amount is lower than OCBC’s 5.5% but higher than UOB’s 4.79%. As such, by looking at dividend yield, it could be a reason for choosing OCBC over the other two banks.
Well, before you buy, it’s essential to consider whether it’s worth buying bank stocks at the current market condition, as the risk-free interest rate is 2.8% (Singapore Savings Bond). If the additional 2-3% yield from bank stocks is worth the risk, local banks may be attractive, but if the outlook for banks seems gloomy, investing in them may not be a good idea.
Conclusion
Overall, the local banks have performed well and are expected to experience consistent earnings on a quarterly basis in the shorter term, thanks to the refinancing of loans. However, the long-term prospects for these banks may be uncertain, and investors should exercise prudence when considering investing in banks.
It is crucial to keep abreast of market trends and make informed decisions based on a thorough evaluation of the risks and potential rewards involved.
