I want to recap Singapore banks’ dividends today.
First things first, shares of DBS, OCBC and UOB have hit new highs this year — DBS is up 44%, OCBC is up 30%, UOB is up 27% year to date.
They have even beaten some of the biggest US blue chips in performance.
And this was largely driven by its solid growth today.
What’s driving DBS, OCBC and UOB shares performance?
Now, if you believe in the strength of our Singapore economy, then the logical conclusion is to buy Singapore bank shares now. Why?
Singapore banks dominate the local deposit market.
They have created an impenetrable moat in the banking business.
What’s more, unlike the more aggressive investment banks – which sell IPOs, do M&As, and trading securities, commercial banks like DBS, OCBC and UOB rely on depositors’ savings to sell loans and drive asset growth.
Commercial banks are a boring business. And they are consistently profitable businesses.
But what I’ve noticed so far, isn’t DBS, OCBC and UOB loans that’s driving their solid financial results.
Instead, what I’ve noticed is their latest quarterly results were driven by wealth management fees.
In fact, DBS wealth management fees grew 47% in its 3Q2024 results.
This has dwarfed its other business segments including loans, credit cards and transactional services.
Meanwhile, OCBC wealth management fees grew 25% y/y during its latest 3Q2024 results.
And UOB? Same thing.
Banks’ wealth management — a crucial growth driver
Here’s the thing: Singapore banks are building their wealth management business. This is a recurring form of banking services. This is because wealth management’s affluent customers tend to be “stickier”.
You see, banks typically charge a recurring “management fee” to look after these customers’ assets. The more assets these banks raise, the more fees they collect.
It’s different from investment banks and commercial loans business where they can be driven by more volatile corporate profits.
China’s struggling economy has been a horror story – property debt crisis, low inflation and a weak consumer outlook.
I believe Singapore’s wealth management has done well because no one wants to put money in Hong Kong anymore.
China’s horror story has forced wealth assets out of the country over the last couple of years. These wealthy assets escaped right into Singapore.
China’s recovery
I admit, China still has economic problems it needs to work on. That has scared investors and wealthy customers from putting money back into the world’s second largest economy.
But at some point, if you believe in the China recovery, money will come back to Hong Kong.
This could mean one thing – renewed competition between two island cities.
Already, we’re seeing financial investment coming back alive into the Hong Kong stock market.
Now the question comes: will I continue to pay such high prices knowing the risks from these banks at some point will be hit by a re-opening of China’s economy?
Are Singapore banks worth buying today?
Much of the valuations we see today are probably coming from the huge wealth management growth.
Then I ask: would I be willing to pay for Singapore banks’ valuations today?
The last time DBS, OCBC and UOB had such strong growth was during the global financial crisis.
Today the same forces are at work. With growth coming from wealth management.
I like to take a leaf from a book I read:
“Decades of stock market research has produced strong evidence that high quality stocks with long histories of dividends and rising dividend trends generally fluctuate between repetitive extremes of high dividend yield and low dividend yield. This is the result of market participants anticipating or reacting to news and information from the worlds of economics and politics.”
There’s nothing hidden about DBS, OCBC and UOB’s strong profits.
But how well does the stock market know in getting DBS, OCBC and UOB’s true value in the short-term? I’m not sure.
Today, Singapore bank shares’ P/B ratio trade at a much higher than their 10-year P/B ratio average. For instance, the average P/B ratio DBS trades at historically is at 1.35x.
It trades closer to 1.7x, which is 24% more than its historical valuations.
Would there be a catalyst for a correction?
Banks move in cycles. This is because it’s driven by interest rates. It’s driven by the economy.
There will be times when banks will get too expensive and sell off.
In 2007, shares fell from its peak during the GFC.
In 2011, Singapore banks sold off again because of the US debt ceiling crisis.
In 2018, US-China trade wars and potential rate hikes.
Then in 2020, Singapore banks were big opportunities to buy — yep, I bought more too.
Are Singapore banks’ dividends sustainable?
Over the last couple of years, DBS, OCBC and UOB have been paying consistent, growing dividends.
DBS has grown dividends since 2014, except during COVID in 2020 when MAS put a dividend cap on Singapore banks.
What’s driving share performance is Singapore banks’ asset growth. Unlike US banks, China banks or any emerging market banks, Singapore banks monopolize the entire industry.
I think Singapore banks dividends are sustainable, driven by its commercial bank businesses.
What’s more, all three Singapore banks have a healthy dividend payout ratio, which means, even if profits drop, they probably could continue to maintain its dividend growth.
The problem I have is when I’m collecting dividends from high quality assets like Singapore banks at the wrong price. I don’t want to be collecting dividends while seeing the value of my shares keep falling.
My Final Thoughts
DBS, OCBC and UOB dominate the loans and deposits market. There’s little competition other than our 3 local banks. This makes their deposit franchise strong.
Having said that, most of what’s going on here is the strong share performance from incessant buying by investors.
The real buyers today are the stampede of investors who don’t want to miss out on capturing the latest growth of Singapore banks – wealth management.
No matter how attractive it seems, it doesn’t mean I would invest in it at any price, regardless of valuations.
If I’m buying, I want to get my right price tag for the quality assets I pay. Everyone should have Singapore banks for dividends in their portfolio – it makes perfect sense. But the price I’d pay is more crucial.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
Dear Willie,
1) I collected my bank shares from 2015 to 2016 during one of the many crisis I lived through & survived. I emptied my war chest, then dipped into my CPF OA to DCA all the way down. I managed to collect DBS at $13.18, UOB at $17.76, OCBC at $7.66.
2) I still hold them till this day, i believe they have appreciated quite a bit.
3) With hindsight, it was the right investment decision, but to keep buying when the shares is falling is easier said than done. Investing is simple, but never easy…
HI minx,
Nice! I really like your long-term investing mindset. Yeah it’s definitely not easy to have the stomach to hold volatility.
Mr Keng, I am reading you loud ; the analysis is thoughtful. Thank you. Retiree.
HI Mr Tan,
I appreciate your kind words. Thank you!