Readers know I’m a close follower of DBS, OCBC and UOB shares.
Year to date, price action of Singapore bank shares have showed a lot of resilience, driven by their strong 1Q results…
- DBS net profits rose 43% y/y to S$2.5 billion
- OCBC net profits rose 39% y/y to S$1.8 billion
- UOB net profits rose 74% y/y to S$1.6 billion
And wow… these are indeed solid numbers.
What’s more, strong profits beget high dividends. With these banks’ high dividend yield, defensive share price and strong results, should I buy Singapore bank shares today?
Well, let’s talk about it.
DBS, OCBC and UOB shares’ high yield — dividend trap?
And so far, shares traded at mid-points of their respective 52-week range:
- DBS trades between $30 to $36
- UOB traded $27 to $31
- OCBC trades between $12 to $13
By the way OCBC shares trade at a lower price versus DBS and UOB doesn’t mean it’s cheap. It traders at a lower price because it has a much larger number of shares compared to DBS and UOB.
Put it this way… these banks’ dividends now trade at pretty high yields:
- Last year, DBS paid S$2.00 per share (include special dividends) – 6% yield
- UOB paid 68 cents per share – 4.8% yield
- OCBC paid 68 cents per share – 5.4% yield
That’s an average 5.4% yield. Not too bad.
But the more I think about it, the more I think this is where it gets tricky.
Banks can afford to pay juicy dividends because of higher interest rates since last year, which led to higher profit margins.
DBS CEO also said: “Our ROE reached a new high of 17% in the second half of 2022. Higher interest rates were a big tailwind, but the record profitability was also driven by significant improvements we made to the franchise.”
Now, higher interest rates leads to higher profit margins, which leads to high bank earnings.
But what’s crucial is whether banks are ALSO growing their loans.
Since 2010, Singapore banks have grown profits by largely growing their loans.
For instance, OCBC grew loans by more than 24% between 2010 and 2015. Over that same period, DBS and UOB also saw double-digit loans growth.
All this is because back then, interest rates (Fed funds rate) were ultra-low, which made borrowing money easy — and cheap.
What’s different today is these huge loan growth has slowed because of higher interest rates.
Put it this way, if massive loan volume starts slowing down…
And economy starts to turn…
My gut feel is banks’ profits could be hit. This could also lower banks’ dividends.
So far, loan growth has slowed last year.
DBS loans was up only 4%…
OCBC loans grew only 4.5%…
And UOB loans grew 5%…
Singapore banks aren’t clocking huge loans growth to justify its high price, for now though.
According to Phillip Capital’s research, loans have continued to slow: “Overall loans to Singapore residents — which captured lending in all currencies to residents in Singapore — fell by 4.88% y/y in May to S$799 billion. Business loans fell by 6.82% y/y in May. Consumer loans were down 1.63% y/y in May to S$309 billion, as…”
So… should I sell all my Singapore banks?
Not really… though banks trade in a cyclical manner, it’s darn hard to time the market cycle for banks.
But what I observed is DBS, OCBC and UOB shares always move in a cyclical upward manner — simply because higher share performance are driven by growing profits.
It’s a matter of how fast or slow these profits grow that determine when we should buy these shares.
More importantly, what I think is a big driver of banks’ future profits isn’t going to be from interest costs or loans growth. But shares performance is going to come from the growing wealth management industry.
You see, according to MAS, Singapore continues to attract a huge amount of wealth from all over the world.
And Singapore banks are capturing a large part of this wealth flows.
More sticky inflows of wealth assets — mainly coming from China, Hong Kong and Europe. With Singapore’s strong Singapore dollar, it attracts a lot of money from all over the world.
The banking business is still a great business – especially when it comes to using “other people’s money”.
It takes in deposits at a small cost, then lending out these monies to companies at a much higher yield. The difference between what it collects as yield and pays out to depositors is the profit margin. And that has been very steady.
It can only do this because in Singapore, all three banks monopolize the entire deposit market – creating a strong deposit franchise amongst themselves.
I don’t think even digital banks have the massive deposit franchise – that banks are still safe fortresses to store our wealth – DBS, OCBC and UOB have.
Put a gun to my head — should I buy DBS, OCBC or UOB shares?
Let’s say you want to buy a bank share, what’s really worth buying ?
If we take away special dividends, DBS shares trade at 4.8% yield. UOB shares trades at 4.8% yield.
Only OCBC shares is the highest 5.4% yield amongst the three. And that’s probably worth buying for now.
Disclaimer – Diligence members will know I own all three Singapore banks.
My final thoughts — play the fundamental game
In the short-term, price action is king.
But it never really tells you the full story.
What matters is rolling up our sleeves uncovering the fundamental drivers of banks. In essence, banks are a long term play.
And the key is understanding their fundamentals, and figuring out what their valuations are at the point in time and whether these valuations make sense.
While Singapore banks offer a high dividend yield today, it’s driven by higher interest rates. Not a high loans growth. This could affect dividend payouts if interest rates start dropping, and loans growth continue to decline.
Instead, I’d really be interested in bank shares when loan growth starts picking up.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan