It’s that time of the year again. The three major banks in Singapore – DBS, OCBC, and UOB – have just released their financial results for the second quarter of 2023.
Let’s dig into these numbers to figure out how these banks are performing and which one might be the best investment option right now.
Local banks reported strong earnings again!
Here is a summary of key metrics for the three banks.
| DBS | OCBC | UOB | |
| Market Cap | 88.6B | 58.4B | 48.6B |
| Revenue Growth (YoY) | 35% | 30% | 31% |
| Net Profit Growth (YoY) | 48% | 34% | 27% |
| Forward Dividend Yield | 5.4% | 6.2% | 5.9% |
| Net Interest Margin | 2.16% | 2.26% | 2.12% |
| NIM Growth | 4 bp | -4 bp | -2 bp |
| Non Performing Loans | 1.1% | 1.1% | 1.6% |
| Capital Adequacy Ratio | 14.1% | 15.4% | 13.6% |
| Return on Equity | 19.2% | 14.3% | 14.1% |
| Price to Book | 1.50 | 1.11 | 1.19 |
| Price to Book Median (5 years) | 1.33 | 1.05 | 1.13 |
As observed, all three local banks have demonstrated strong performance, with their Q2 2023 revenue showing a notable increase, primarily attributed to the rise in net interest margin compared to the previous year.
This isn’t a new development, as over the past few quarters, the combination of higher net interest margin and an uptick in loans being refinanced at elevated interest rates has consistently bolstered the banks’ profitability.
That said, as we shift our focus to a quarter-by-quarter analysis, a more nuanced pattern emerges – the signs of revenue and net profit peaking become discernible. Examining the sequential growth in revenue across the three banks, the range lies between 1% and 3%. This takes a more sobering turn when we examine net profit, with OCBC and UOB already witnessing a decline in their earnings.
This naturally raises the question:
Can Singapore banks sustain their revenue growth in the coming quarters?
????Net interest margin has peaked
To kick things off, let’s take a closer look at the cornerstone of the banks’ financial growth – their net interest income, which has been a primary driver of revenue expansion in recent quarters. This growth has been underpinned by the surge in interest rates, a move aimed at reigning in inflation, and it’s evident that this has significantly contributed to the banks’ overall profitability.
However, as the saying goes, all good things must come to an end, and it appears that the broader market is approaching the conclusion of its cycle of raising interest rates.
Following the US Federal Reserve’s rate hike in July, a prevailing sentiment has taken hold – the expectation that the Fed will put a hold on further rate hikes for the remainder of 2023. While there remains a potential risk of one more 25-basis-point hike, the prevailing consensus leans towards the winding down of this upward trajectory.
This trend is echoed across a spectrum of Asian central banks, which have collectively signaled their intention to bring their own rate-hiking campaigns to a close. As we pivot our attention to the banks’ earnings presentations, the impact of this shared sentiment becomes evident, particularly when we examine the net interest margin (NIM).
The table below serves as a visual representation, capturing the evolving trend across all three banks. Net interest margin growth is either plateauing or showing signs of discernible decline.
Notably, DBS’s growth has experienced a perceptible deceleration, while UOB and OCBC have grappled with a continued decline in their net interest margins.
????Bank Loan Growth has stagnate or started to decline
Growth in bank loans could also be a source of revenue growth, but as anticipated, when interest rates are elevated, businesses tend to be more cautious about borrowing funds.
This caution has led to a situation where loan growth has either remained stagnant or experienced a decline.
With both the net interest margin (NIM) and loan growth reaching their peaks, the era of remarkable year-on-year growth might be coming to an end for these banks.
Net Interest Income Should Still Be Stable…for 2023
Of course, it is unlikely that the net interest income will drop suddenly from here on out since interest rates are expected to remain high. That is at least until the end of the year before the Fed begins to cut them, possibly from 1Q 2024 onwards.
Furthermore, two factors could continue supporting the bank’s interest income.
Potential Refinancing Demand
Firstly, there is potential for a boost through customers seeking to refinance their mortgages and loans, especially those still tied to lower interest rates. DBS, in particular, has indicated that around one-fifth of its commercial portfolio is yet to undergo repricing, which could potentially offer some form of support.
Singapore Banks have ample liquidity
Secondly, all banks seem to maintain ample liquidity, with UOB and OCBC registering an increase in deposits. In a scenario where interest rates decrease, there is the possibility for local banks to effortlessly pass on these lowered rates to depositors, without suffering from a squeeze on their net interest margins (NIM).
Nonetheless, it’s important to acknowledge that even though stable income could be sustained for a few more quarters, the prospect of witnessing the same remarkable growth in net interest income is rather unlikely.
Other segments not growing as fast
Beyond interest income, banks generate revenue from diverse sources such as wealth management, cards, investment banking, and transaction services, collectively categorized as their non-interest income.
In this realm, we also observe a lack of substantial year-on-year growth across the board. All three banks exhibit growth rates that are either less than impressive or even experiencing a decline in their non-interest income. Notable among them is OCBC, which stands out due to its insurance arm, Great Eastern. This segment witnessed a noteworthy surge of 26% in year-on-year insurance profits.
When scrutinized on a quarter-to-quarter basis, this sluggish growth becomes more pronounced. This trend strongly suggests that the anticipated deceleration in interest rate income cannot be adequately compensated for by fee-based income.
Singapore Banks Valuation
Taking into account the aforementioned factors, the question arises: is investing in local banks a prudent choice at this juncture? To answer this, we need to delve into their valuation.
Considering the price-to-book (P/B) ratio, recent dividend increases have nudged the P/B ratio of the three local banks slightly higher, steering them away from their historical median, often referred to as the fair price benchmark.
When making a comparison, it becomes evident that DBS retains the highest valuation, both historically and in comparison to its counterparts. On the other hand, OCBC emerges as the most attractively priced among the trio.
| DBS | OCBC | UOB | |
| Price-to-Book | 1.5 | 1.11 | 1.19 |
In essence, DBS appears to be somewhat stretched in terms of valuation. Therefore, it appears that OCBC or UOB could potentially present as more favorable alternatives for investment.
Here’re the historical Price-to-book ratio for each of the Singapore Bank:
DBS Price to Book (2Q23)
OCBC Price to Book (2Q23)
UOB Price to Book (2Q23)
Singapore Banks had Increased Dividends
Shifting our focus to dividends, it’s notable that all local banks have elevated their dividend payouts, consequently enhancing their yield attractiveness. A peer-to-peer comparison allows us to discern that OCBC stands out in this arena. Presently, it offers a forward dividend yield of 6.2%, surpassing both DBS at 5.4% and UOB at 5.9%.
| DBS | OCBC | UOB | |
| Forward Dividend Yield | 5.4% | 6.2% | 5.9% |
Considering these factors, the case for OCBC becomes even more compelling. Not only does it possess a more reasonable valuation, but its higher dividend yield adds an appealing layer to the investment proposition.
Given these aspects, if I were to make a banking investment today, OCBC would likely be my preferred choice.
Should you buy Singapore Banks now?
Nevertheless, the decision to invest hinges on your individual investment goals. The recent increase in dividend announcements certainly adds allure to these banks, particularly for dividend investors seeking reliable income streams.
That said, the latest earnings results have illuminated a potential plateauing growth trajectory for these financial giants. The ongoing trend of rising interest rates, which has been instrumental in their profitability, seems to be reaching a turning point. This invites a thoughtful reassessment of one’s investment strategy in light of the evolving dynamics within the banking sector.
In evaluating the options, considering the banks’ valuations and dividend yields, OCBC emerges as a standout candidate. Its favorable combination of a lower valuation and a higher forward dividend yield offers an attractive proposition, aligning well with those seeking both affordability and income potential.
In the end, the decision to invest should be a well-informed one, considering factors such as investment objectives and risk tolerance. While the banks continue to exhibit strong fundamentals, making sense of the current landscape and aligning it with your financial goals will undoubtedly guide you toward a prudent investment choice.
