Last week, I wrote here about whether I’d sell OCBC after its dividend cut. Today, let’s look at bigger picture of Singapore banks.
Shares of all DBS, UOB and OCBC have hit all-time highs over the past year:
- DBS: +49% gains
- UOB: +21% gains
- OCBC: +21% gains
In fact, at one point DBS has surged beyond S$50 – a record price. Meanwhile, both OCBC and UOB shares are flirting around their peak.
Normally, I’d feel good.
Credit: Google Finance
After all, I own all three Singapore banks. And they have paid me solid dividends.
But this time, my gut feel is different.
DBS, UOB and OCBC 2Q2025 results – a mixed bag
First things first, DBS, UOB and OCBC have all reported 2Q2025 results. OCBC cut its dividends.
Both DBS and UOB reported mixed numbers. This confirmed my own suspicion.
At first glance, DBS’s results looked strong. Its 1H2025 pre-tax profits hit a record S$6.8 billion, up from last year, ROE at 17%, and asset quality remained resilient.
But as I dug deeper, the results tell me DBS net interest margins have actually been falling quarter after quarter.
In fact, Net interest income has been falling over the last few quarters – from S$3.8 billion to S$3.6 billion.
Credit: DBS 1H2025 Financial Results
Sure, this tells me DBS 1H2025 results >> 1H2024 results. However, since late last year, its loan growth has also been quietly slowing.
Same goes for UOB. Its latest 2Q net interest income has been falling quarter after quarter.
Credit: UOB 1H2025 Financial Results
I wish I was wrong. But I really don’t like what I’m reading – That the numbers suggest we’re nearing a peak in the interest rate cycle.
As a famous economist said: “When the facts change, I change my mind.”
Click here to read: Is United Hampshire REIT’s 8.7% Dividend Yield a Bond-Like Income Play?
Bank share performance move with interest rate cycle
See, interest rates are the traffic lights of the economy.
Problem is, financial motorists don’t really stop when it’s red and go when the light turns green. You can’t expect markets to follow academic rules.
When Mr. Market expects rates to fall, banks start lowering lending rates on loans. Normally, cheaper loans boost demand. But this doesn’t happen instantly.
Because loan growth takes time to respond. Loans don’t adjust in locksteps to interest rate shifts.
As we slowly move into a new interest rate regime, lower interest rates will immediately impact lower profit margins, with little rise in loan volume.
First, banks suffer from “margin compression”. Net interest margin, which is the spread between what banks earn on loans and pay on deposits – shrink.
As banks adjust to a new rate cycle, profit margins suffer.
Next, cutting rates usually signals an economic slowdown. This could further impact banks’ growth. This is despite banks cheapening loans to encourage business expansion and consumer spending.
After reading the banks’ latest results, I’m convinced the current cycle is changing. But Mr. Market is not noticing.
After all, the market is complex – sentiments and business fundamentals often move in opposite directions. As much as I want the market to be in sync, this is never reality.
Now, if you’re not in Singapore banks, you’ve underperformed the Singapore stock market. Singapore banks account for ~43% of the STI Index market cap.
Which brings me to my critical point: Is it still worth buying DBS, UOB and OCBC? Or should I just sell everything at all-time highs?
Singapore banks’ valuations are stretched — I’m careful
I hate to admit this: Singapore banks are now traded like growth stocks even though they are cyclical stocks.
Let’s take a step back: All three Singapore banks are trading at historical high P/B ratios.
PB ratio is a measure of how much an investor would pay for its net tangible assets.
It signals how optimistic the market is for growth. The higher the PB ratio, the more optimistic.
For instance, if you’ve to pay ~2.3x PB ratio for DBS shares, you’ve to be sure DBS must sustain its impressive growth.
With slowing loan growth and falling margins, I’m not that sure. I’m not that sure.
But… isn’t wealth management the next big thing?
I agree. I was in private banking. I’ve said before wealth management is a hidden goldmine. And Singapore banks are a giant vacuum, sucking up much of the wealth assets in Asia.
Especially when foreign investors are fleeing China/HK markets.
The thing is, no matter how powerful DBS, UOB and OCBC attract new money, wealth still accounts for a smaller of their banking business.
Which means, a large part of its profitability must come from traditional loans business.
Wealth management is strong growth. And the market is always optimistic with new growth. That’s what’s driving DBS, UOB and OCBC share prices today.
But my long-term dividend investing view is: Banks’ sustainable dividends must also come from loan profits.
So… Would I buy more Singapore bank shares? Or sell all of them?
My contrarian view really depends on my entry price.
I’ve accumulated my Singapore banks stocks at a very reasonable price. That gives me a substantial margin of safety. Moreover, my dividend yield on cost is sufficient enough for me. There’s no reason to sell.
But I wouldn’t buy DBS, UOB and OCBC shares today either.
See, their 2Q results versus what I’ve assessed with their rich valuations don’t make much sense.
Like what I’ve said in my OCBC previous article:
“If I had bought OCBC shares at its peak recently, I’d have a much lower, riskier margin of safety. Plus, I could be trapped in “no-man’s land”. Why?
… It’s a concoction of premium prices, peak cycles and a cyclical business.”
Gun to my head: Buy DBS, OCBC or UOB? Which is still better?
I’d look at UOB, OCBC and then DBS, according to how attractive their dividend yield.
But I still must say this and I’ve said in my email newsletter back in 22 September 2024: Banks are cyclical.
And shares of banks behave cyclically.
My pro-tip is this: Bank shares are affected by macro surprises: US debt crisis in 2011, Trump elections in 2016, interest rates hike in 2018, COVID-19 pandemic.
The time to buy comes when such surprises jerk bank shares. Or when bank shares become unloved (just see red boxes below).
My final thoughts
Look, I might be wrong with all this.
Perhaps, I might leave plenty of missed gains on the table.
What I’ll say is this: long-term dividend investing is achieving your own financial goals.
With the markets bouncing up and down so vigorously, my competitive advantage is focused on protecting my downside first.
The real problem I have is when I’m collecting dividends from high-quality assets like Singapore banks at the wrong price. Because I don’t want to be collecting dividends while seeing the value of my shares keep falling.
More important, I don’t incur unneccesary losses at “rich valuations. And yes, I’m no virgin to incurring unneccesary losses.
Benjamin Graham often said Mr. Market is manic-depressive. Some days it goes wild and offers you a price you have to ignore. Other days, it just offers you a price you just cannot refuse.
Today is not that day.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
Hi Willie,
Great article. Could you do one on Netlink NBN Trust as it pays a solid dividend. However, I understand it pays out dividends exceeding its own profits and operating cash flows. Dividends are paid out from borrowed funds or reserves. Is there is sustainability issue or Netlink’s is a unique case that they can keep doing this kind of dividend payout sustainably?
Hey gingko1,
Noted on this, thank you!
Cheers,
Willie
Thank you for your analysis and your thinking. Surely every one has to take in all inputs and ultimately make their own investment decisions. I was looking at the chart you showed on the down-cycles. Did you notice that the down-sides where taking longer time in between two down cycles as time progresses? As a divdend income investor I see this as a loss of divicend income for waiting for the next cycle (for those who have not invested). Just my 2 cents.
Hey Sonny,
Thank you for pointing out. It’s an interesting observation. If, dividends are resilient, investors will still get paid during downcycles. That’s the beauty of dividend investing.
My take is cycles are supposed to be shorter these days, which means more opportunities to “buy in”.
Cheers,
Willie
Hi all, what do you think about compare the reasonable mid term PE ratio of 3 banks?
Hi Jim,
For Singapore banks, I prefer to use PB ratio and dividend yield. I believe market uses these market multiples to value DBS, OCBC and UOB.
Cheers,
Willie