OCBC just cut dividends. I didn’t expect this to come this soon. Especially since the Fed hasn’t started its massive rate cut cycle.
Yet I’m already seeing OCBC taking the first step. Honestly, I’m not getting a good feeling about this.
OCBC latest 1H2025 financial results – a wake up call
Last Friday, OCBC reported its first-half financial results. Net profits dived 6% to S$1.8 billion, as compared to a year ago – call this “softer interest rates” environment.
Credit: OCBC 1H2025 Financial Results
As I’ve written before in my other Singapore banks article, banks are sensitive to interest rate cycles.
When Mr. Market expects interest rates to go down, banks start reducing their loan rates to stay competitive with peers. This is what OCBC has said: a “significant drop in the benchmark this year.”
In its 2Q2025 results: “Net interest income moderated by 3% from the previous quarter to S$2.28 billion, as a 2% increase in average assets was more than offset by a 12 basis-point contraction in NIM to 1.92%. The NIM decline was largely associated with the downward repricing of SGD and HKD denominated loans, as a result of the significant drop in the benchmark rates this year, which outpaced the reduction in deposit costs. The strategic deployment of liquidity into income-accretive high-quality assets in 1Q25 also weighed on NIM.”
This compresses a bank’s net interest margins, which eats into profits.
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This brings me to my next point…
Lower profit margins… Yet slower loan growth
By right. when interest rates fall, we would see a surge in loan demand. And banks’ profits during low interest rate cycles should be compensated by a proportionate rise in loan volumes. Why?
Lower rates attract more consumers and corporates to take advantage of cheaper loans.
In other words, asset volume should go up.
However in this case, OCBC’s overall loan yields were dropping. And it’s not seeing that proportionate rise in loan volume to offset the drop in profits. This worries me.
Because lack of loan growth in a falling rate environment means weaker profits. Which means slower dividend growth.
Despite OCBC cutting dividends, the good news is, it’s still sticking to a 50% payout ratio. Including special dividends, the total payout ratio is 60% for FY2025.
Credit: OCBC 1H2025 Financial Results
OCBC’s bright spot: wealth management growing
Now, OCBC’s bright spot is that non-interest income continues to go up. I’ve said previously Singapore banks wealth management will drive the bulk of its profits in the near future.
In its latest financial results, its net fee income was 19% higher, and wealth management fees were doing very well.
According to OCBC: “The Group’s wealth management income, comprising income from private banking, premier private client, premier banking, insurance, asset management and stockbroking, increased 4% to S$2.66 billion. Group wealth management income accounted for 37% of total income, higher than 35% in 1H24. Our Banking wealth management AUM expanded by 11% to an all-time high of S$310 billion, driven by both net new money inflows and positive market valuation.”
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Would I sell my OCBC shares at all-time highs?
Here’s a contrarian view:
For Singapore banks it really depends on what price you paid. And this is unique for me. I’ll explain.
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?
OCBC’s P/B ratio has climbed so much over the past year.
In fact, at current ~1.4x P/B, this is trading much higher than its historical average 5-year PB ratio. I wouldn’t care so much on valuations if OCBC aggressively grows its loan volume and net profits.
But that’s not the case. Recall what I said earlier about interest rate cycles? Earnings peaking. Dividends have just been cut.
It’s a concoction of premium prices, peak cycles and a cyclical business.
The thing is, what’s unique for me is I bought OCBC shares when it was comfortably below S$10. At this price range, I believe there’s sufficient margin of safety. And I’ve a healthier yield on cost for my OCBC stock position.
Of course, some investors are happy locking in a 5% yield. Others are fine with 3% yield. Some just trade Singapore banks for short-term profits. To each his own.
But my case is simple – I want to pick stock prices with a reasonable margin of safety.
That said, I’d sell straightaway if I knew I’d overpaid for a business.
Or if I figured I’m not getting enough margin of safety.
If you own OCBC shares at 1.4x P/B, I guarantee you there’s not enough margin of safety.
At one point shares of OCBC traded at 2.0x P/B ratio in 2007, just before the global financial crisis unfolded —shares plummeted by more than 55%.
Market is self-correcting when it comes to valuations.
How does OCBC compare to DBS and UOB? Would I buy more?
But Willie, OCBC trades at a more attractive dividend yield than DBS and UOB today:
- OCBC: 5.06% dividend yield
- DBS: 4.99% dividend yield
- UOB: 4.89% dividend yield
Should I buy more OCBC shares? I believe earlier I’ve made my position clear.
I do spend a lot of time thinking about markets. And the harsh truth is this and I’ve said this in my latest Diligence Research Report Aug 2025:
“There are really only two things you need to pay attention to make massive profits in the stock market. What’s crucial for investors to know: If you want to accumulate massive, lasting wealth in the stock market, you need to stick to simple, ground rules. I can’t promise your investments will be the same as mine – or anyone else. But I believe we can be better investors if we always stick to these rules:”
- Find great businesses that can last for decades
- Buy these shares at “low-risk “prices
- Be patient
Call it gut feel. When Singapore banks start to trade at all time highs, I don’t have a good feeling about this.
What dividend investors should watch next
DBS and UOB are reporting results next.
For DBS, UOB and even OCBC, I focus on three things:
- I pay attention to interest rate cycles and peak earnings. Are interest rates likely to fall further? Are we seeing any increase in loan volume to offset any drop in loan yields?
- How are valuations trading to its historical average?
- Earnings quality: Are banks higher fee income more resilient in a low-rate environment
My final thoughts
OCBC cuts dividends, yet shares are still trading at all time highs. OCBC shares are stuck in “no-man’s land”. Am I selling OCBC today? No. Am I putting more money in OCBC at today’s market highs? No.
As interest rates get cut, peak dividends are going to maintain at best… for now. The signal to watch for is dividend growth.
Numbers aren’t looking well. While OCBC saw lower profits, loan growth slowed. That surprises me.
Call me a skeptic, criticize me for calling in early for a peak, but gut feel tells me it’s better to stay safe.
Eventually, markets will mean revert.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
