Last week, I warned about DBS, OCBC and UOB hitting record highs – healthy profits and big dividends. Over the past year…
- DBS shares: +39%
- OCBC shares: +13.8%
- UOB shares: +17%
After I wrote that article, I’ve gotten this common question, which I’ll sum up: So Willie, what’s your view if we trade Singapore banks as a growth stock instead as dividend stock?
In other words, which Singapore bank is a better buy at market highs – DBS, OCBC or UOB? Well, here’s how I’d approach this.
DBS, OCBC and UOB – Two critical indicators you need to know
First things first, I need to tell you I’m a fundamental investor. I look at buying stocks at buying a part ownership of a business. I also need to tell you I own all three Singapore banks.
To decide which Singapore bank is a better buy, we need to focus on two things. I’ll start with the second thing:
Return on equity. Why?
You see, Warren Buffet has repeated this for decades, as early as the 1970s (flip to his 1972 letters to shareholders). He looks for companies with an unusually high return on equity.
These are businesses that generate strong returns without needing massive capital.
What’s equity? It’s basically the net tangible value assets. Or the total amount of net capital used by the company. You calculate by taking total assets minus any intangible assets (like goodwill). Then subtract total liabilities from this.
ROE is the rocket fuel that drives Singapore bank shares performance.
The higher the ROE, the more a company can pay dividends, reinvest for growth and drive stock performance. It shows how “capital-efficient” a company uses its resources.
If we compare all three Singapore banks, DBS performance has been incredible. In fact, after 2020, DBS surged ahead of OCBC and UOB in capital-efficiency.
I know, higher interest rates helped boost all three Singapore banks’ profits. And it was wealth management that drove DBS true performance.
When China’ tech crackdown and property crisis forced the country into a bear market, it drove huge capital out of the mainland and Hong Kong. Singapore became Asia’s safe haven. Singapore banks were in the right place at the right time.
And I believed over the past years, DBS made the right call to invest in its wealth management.
But the first critical thing you need to know and the real kicker is: a massive deposit franchise.
You see, DBS had a far larger deposit base compared to OCBC and UOB. Its dominant deposit base and stronger franchise pulled more wealth assets into its ecosystem – capturing a bulk of the wealth inflows.
The thing is, more deposits mean DBS can lend money to wealthy clients at a far competitive funding rate – even preferential returns to investment products due to cheaper funding costs.
Cheaper funding rates draw even more clients, creating a network effect that can serve even more clients. Bigger deposits attract more deposits.
What’s more, a large deposit base also signals reliability and trust – two big criteria when wealthy clients decide to put their assets with banks. Bigger deposits attract more deposits.
The bigger the assets, the more it attracts depositors.
In other words:
- ROE: Highest amongst three banks
- Deposit franchise: largest in Singapore
- Focused on wealth management.
- DBS is the king of deposits.
DB became the top natural magnet for wealth management.
How about the other two banks?
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OCBC: Steady profits, driven by diversified businesses
OCBC also grew its wealth management segment, supported by Bank of Singapore and Great Eastern. However, it didn’t have the natural deposit strength as DBS.
My quick assessment shows: OCBC’s dividend yield is higher than DBS. OCBC’s ROE is good but still behind DBS. OCBC diversifies into insurance, which reduces capital to growing its wealth management business.
OCBC pays steady dividends but lacks DBS’s explosive ROE growth.
UOB: High dividend yield and focused on SEA regional expansion
Lastly, UOB focuses on regional expansion. After it bought Citigroup’s assets in 2022, it further grew its traditional banking segment. UOB chose to prioritize its loans business >> wealth management.
That’s why UOB’s dividend yield is much higher than DBS and OCBC. This is despite UOB’s ROE being lower than both its peers.
Like I’ve said: traditional banking business ultimately drives steady dividend growth.
DBS, OCBC and UOB: Which is a better buy?
In a stock market melt up, Singapore banks are now traded like growth stocks instead of cyclical stocks. If you ask me, I’d go for the bank with the best growth in wealth management.
To me, ROE is the money shot.
For serious dividend investors – pick UOB
If I were to rank all three Singapore banks, UOB is the best Singapore bank stock for dividend yield today. Followed by OCBC, which has signalled a dividend cut. And then DBS for dividend yield secured by their high-quality assets.
But Diligence Club members will know I’m not buying all three Singapore banks – they are already above my Right Price range.
What’s more, it’s the traditional banking business that drives steady dividend compounding.
Wealth management growth is a concern
At some point, I believe foreign capital will return to Hong Kong. It is already happening.
Also, let’s put banks in context. The wealth management business still accounts for the smaller portion of all three banks’ profitability. That means you have got to focus on the main business at heart.
Which means, in the long term I’ll focus on how healthy Singapore banks’ traditional loans business is.
Would I buy Singapore bank shares today?
As time will tell, a phase of Singapore banks outperformance would give way to a phase of Singapore banks underperformance. And vice-versa.
The greater the number of years I stay invested in the markets (over 15 years now), the more I’ve come to believe market cycles will turn.
You can’t ignore the fact Singapore banks already account for 43% of the STI Index.
And you can’t ignore the fact Singapore banks have driven a great portion of Singapore market’s performance.
My subconscious mind is screaming at me right now: Singapore banks are outrageous, but they are high-quality. That’s what I want to own. But I can’t own them right now because it’s just so expensive.
What we’re seeing now is this huge premium to Singapore bank assets is a speculative phenomenon.
Do you remember the go-go years of the 1970s? When fund managers were stuck without any great ideas to put their money?
They bought American Express, Polaroid, Kodak and so on, which saw valuations plunged after that.
Today Singapore bank shares are the victims of massive investors’ capital inflows. These investors have absolutely zero idea on whether to put their money today. That’s why we’re seeing a massive rally in Singapore banks.
As much as I like to take part in this speculative trade, I’d prefer to stay on the sidelines.
My final thoughts
Singapore banks have reported strong profits. Readers have asked me which would be a better buy as a “growth stock”.
I’d stick with DBS. The one key metric I use is ROE. This is one important metric to measure how profitable a banking business is And today, DBS happens to have the best ROE amongst all three Singapore banks.
What’s more, it reinvests the capital aggressively into wealth management.
Having said that, Singapore banks are one of the best businesses out there. They are worth buying for the most part.
But every now and then, it can still be a real pain to pay a high price for it.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
