We’ve compiled the most up-to-date Singapore Bank stocks analysis for 3Q22 here.
Banks are one of the beneficiaries of the rising interest rate environment. Given that interest rates are expected to rise in the following quarters, let us examine recent earnings to evaluate if Singapore banks are a good investment. And if so, which of the three local banks is the best?
As I stated in my previous piece, local banks’ capacity to retain growth momentum and consequently, their stock price is still contingent on how the macroeconomic climate plays out.
If inflation rises too quickly, our economy may stall. In that instance, NIM gains will almost definitely be insufficient to compensate for revenue loss due to a drop in the loan book.
If China’s economy continues to slow, earnings growth at local banks will also slow (particularly DBS, which has the largest holding in China, followed by OCBC and then UOB).
These factors seem to be at work right now, and they do not appear to be working in the banks’ favour.
DBS, OCBC, UOB comparison of 1Q22 performance
We’ll analyse each of the three local banks (DBS vs OCBC vs UOB) based on 6 key metrics in this section.
1. Income
Winner: DBS
All three banks experienced negative year-on-year growth, owing mostly to declines in the wealth management and fund management segments.
In the case of OCBC, the company’s life insurance segment has also declined. Nevertheless, the decline is partly offset by the growth in net interest income due to expansion in loan book (albeit at a lower rate) and in the case of DBS and UOB, a minor improvement in its net interest margin.
2. Net Interest Margin
Winner: UOB
Commercial banks, like our local banks, make money by lending to businesses using the money we deposit. The NIM, or average interest margin, is the difference between the interest they pay you and the interest they get from the borrower.
After witnessing stagnant NIM in the previous quarter despite rising interest rates, we are now seeing an uptick in NIM for the majority of the bank. While the rise in NIM is still modest, we can expect it to grow further in the future, benefiting net interest income as loans are refinanced.
3. Non-performing loan ratio
Winner: DBS
The NPL ratio compares the amount of money owed to the bank by borrowers who are unable to repay the interest or principal on their loans to the entire loan book.
Based on recent data, all banks have a solid loan book, with DBS and OCBC strengthening year on year while UOB slipped slightly.
4. Common Equity Tier 1 (CET-1)
Winner: OCBC
CET1 (Common Equity Tier 1) is a ratio that compares a bank’s capital to its assets and is a component of Tier 1 capital that is frequently used on financial institutions as a precautionary measure to protect the economy from a financial crisis like the one that occurred in 2009.
All banks around the world are expected to meet a minimum CET1 level of 4.5%. A higher CET-1 ratio indicates that banks have more capital to absorb unanticipated operations losses.
In Singapore, the Monetary Authority of Singapore (MAS) has imposed additional measures on our three local banks, known as D-SIBs (Domestic-systemically significant banks), raising the CET-1 ratio to 6.5%. These D-SIB banks are those that MAS has determined would significantly impact our financial system if they are faced with financial difficulties. Tier 1 CAR of 8%, Total CAR of 10% (compared to Basel III minimum standards of 6% and 8% respectively), liquidity coverage ratio, recovery and resolutions strategy, and more are among the other requirements imposed by MAS. Yes, with such stringent controls in place, Singapore banks are pretty unlikely to fail.
All local banks’ CET-1 are more than double the statutory ceiling of 6.5%, indicating a robust balance sheet. If we’re being picky, OCBC takes the lead here.
5. Return on Equity
Winner: DBS
Return on equity (ROE) measures how well a company uses its shareholders’ capital to make money.
DBS tops the list with an ROE of 13.1%, followed by OCBC at 10.6% and UOB at 8.8%.
Unfortunately, ROE has dropped across the board year on year, indicating that the company is becoming less efficient at making profit and growing shareholder value.
6. Dividend
Winner: OCBC
DBS is the only bank that pays a quarterly dividend, and it has declared an interim dividend of 36 cents per share. UOB on the other hand, pay dividends twice a year.
As MAS has lifted the bank dividend cap, we may project UOB’s total dividend for the year to be $1.20, assuming it maintains the $0.60 dividend paid in the prior half. OCBC also pays out twice a year. Given that it paid $0.25 in the first half and presuming it will pay $0.28 at the end of the year, we will obtain a total of $0.53 per share.
With a yield of 4.44%, OCBC now has the highest yield. Nonetheless, the other two banks aren’t far behind, with both delivering more than 4% to investors.
Singapore Bank Stocks Valuation: which is the ‘cheapest’ now?
In terms of valuation, DBS (Blue) appears to be trading above its historical price to book, making it the most expensive of the three. On the other hand, UOB (Orange) and OCBC (Purple) are trading in the fair value to slightly overvalue range.
Of course, such valuation has its grounds, as seen above; DBS outscored UOB and OCBC in most metrics; but then again, is a PB ratio of 1.5 may already on the high side. You will have to make the call.
2 factors that differentiates Singapore Bank Stocks
As you can see, all three banks performed well, and any of them could be a solid investment. Looking at the portfolio and the company’s overall trajectory is one technique for investors to decide which to choose.
i) Loan Profiles of each bank
Overall, the three banks have nearly identical loans in terms of industry.
DBS‘ portfolio is heavily weighted toward Singapore and China.
OCBC has the lowest concentration in Singapore of the three banks, with only 43% of its portfolio concentrated in Singapore and the remainder in China and a few Southeast Asian countries.
UOB has the biggest loan concentration in Singapore, at 51%, with the remaining divided evenly throughout Southeast Asia and China.
In summary, choose DBS if you have a strong conviction in Singapore and China, OCBC if you prefer a lower concentration in Singapore, and UOB if you have a strong conviction in Southeast Asia in general.
ii) Global events that could affect Singapore banks performance
We should also consider some key global events, such as the fallout from the Russia-Ukraine war, US monetary policy, and China’s strict lockdown.
Regarding China Covid 19 lockdown, you will have to look at the banks’ exposure to Greater China before making any decisions. With reports of slowing growth, banks’ growth is likely to slow in China, evidenced by their Q1 earnings.
DBS, which holds the largest position, will be the hardest hit, followed by OCBC and UOB. Nonetheless, China remains a huge opportunity for banks, and these banks should maintain a stake in the nation.
Singapore bank stocks for your portfolio?
All three local banks’ portfolios remain resilient and they are likely to continue to benefit from interest rate increases in the future. Their managements are also optimistic about the reopening that is taking place in parts of Southeast Asia as countries seek to restart their economies following the outbreak. Another encouraging aspect is that the net asset worth of all banks appears to be improving, which may justify the valuation increase.
However, based on the most recent results, it seems that the bank’s performance is deteriorating. Don’t get me wrong, it’s still a good result, but the performance slowdown is a concern. Should we fall into another recession, things may not pan out so well for the banks too.
Given that the valuations of these banks are around their all-time highs, it may be advisable to reconsider if you intend to start a new position.
Chris also shared his take on Singapore Bank Stocks here:
If you want to learn how to evaluate bank stocks and other dividend paying stocks, join Chris Ng at his free early retirement intro-class here.
Since mkt is forward looking, how will both DBS and UOB look like if you include the citi asset acquisition? Will the valuation still look steep?
Hello, Aaron. I believe the valuation remains unchanged because the purchases were made with a premium paid to Citi. In another words, DBS and UOB’s price to book did not move significantly because the asset was not purchased at a discount. In a way, banks simply transform their cash into assets.