Singapore bank stocks fall despite record profit. Time to buy?
16 May 2023
There has been an active discussion about Singapore bank stocks in the Beansprout Telegram group recently.
Many have asked why the share prices of DBS, UOB and OCBC have been falling, despite posting record high first quarter profit.
For example, the share price of DBS has come down to below S$31 as of 15 May 2023. This represents a 9% decline since the start of the year, underperforming the Straits Times Index which fell by 1% over the same period.
Likewise, the share price of UOB has also fallen by close to 9%, declining to around S$28 as of 15 May 2023 from above S$30 at the start of the year.
OCBC has fared relatively better, with its share price holding up at about S$12.30, despite having fallen from a peak of above S$13.
Let us dive deeper into what could be driving the share price weakness of the Singapore banks, and see if this is an interesting opportunity .
What is causing the weakness in Singapore bank stocks?
The share price outperformance over the last several years was about an improvement in their return on equity.
Singapore banks have performed well in the past few years as they have reported stronger profit and improvement in return on equity (ROE). A higher ROE is a positive as it indicates an ability to generate more profit from the shareholder funds.
However, growing investor concerns about a peak in net interest margin and a slowing economy might have led to a selloff in the bank stocks.
#1 – Net interest margin might have peaked
DBS, OCBC and UOB reported strong results in the first quarter of 2023, with a record high profit across the three banks.
However, there are concerns about whether we might have seen a peak in the net interest margins of the banks.
If the banks’ funding costs were to rise faster than their lending rates, their NIM would then decline.
Across the three banks, UOB and OCBC already saw a decline in their net interest margin in the first quarter compared to the previous quarter.
For example, UOB’s net interest margin fell to 2.14% from 2.22% in the previous quarter. OCBC also saw a marginal decline in its net interest margin to 2.30% from 2.31% in the previous quarter.
DBS bucked the trend to report an increase in net interest margin to 2.12% in the first quarter.
However, management of DBS noted that the net interest margin of 2.12% in the first quarter may be the peak, and there might be a decline in the coming quarters.
This would mean DBS’s peak net interest margin would be slightly below its previously guided peak of 2.25%. It would also be lower than what the company had forecasted in the previous quarter of 2.18-2.20%.
#2 - Loan growth was also subdued
With a slowing economy, Singapore banks are facing lower loan growth as demand from consumers and businesses weaken.
For example, DBS saw gross loans growing by just 0.6% in the first quarter from the previous quarter.
UOB performed worse, with lower loans compared to the previous quarter as corporates pared down their borrowings with higher interest rates.
More worrying, DBS has lowered its guidance for loan growth in 2023 to a range of 3% to 5%, from mid-single digit growth previously.
Likewise, OCBC has also lowered its guidance for loan growth in 2023 to low to mid-single digit from mid-single digit previously.
What are the positives for Singapore banks?
#1 – Limited non-performing loans for now
The good news for Singapore banks is that their credit costs have remain resilient even with a slowing economy.
Non-performing loans have remained flat or have even fallen in the latest quarter.
However, this could start to deteriorate if there is the economic outlook worsens with an impending recession.
High interest rates and the current inflationary environment could discourage business activities and lead to an economic slowdown, or even recession. This may affect borrowers’ ability to repay debt.
Singapore banks remain confident that they have sufficient buffer through the provisions they have already taken.
For example, gross provisions as a percentage of total loans is about 90 basis points for UOB and DBS. This is higher than the pre-Covid levels of about 70bps in 2019.
#2 – Wealth management fees rebounded
Singapore banks saw a rebound in their wealth management fees as market sentiment improved.
While this can be volatile dependent on capital market activity, the bright spot is that their assets under management (AUM) continue to grow. In other words, there is a larger pool of money to generate the wealth management fees.
Credit card fees continued to grow with increased travel activity, driving up the non-interest income of the Singapore banks.
What would Beansprout do?
We might see more concerns about the earnings of the Singapore banks with the uncertain macroeconomic outlook and a potential peak in net interest margin.
Furthermore, concerns over the potential fall-out from the US debt ceiling stalemate and pressure in the US regional banks may limit investor appetite on banks in general.
However, investors may start to focus more on the dividend payout for the Singapore banks, especially since they are expected to offer dividend yields of between 5.4% to 6.5% this year.
This is higher than the dividend yield of 4.9% offered by the Straits Times Index.
In the first quarter, only DBS paid dividends and maintained it at 42 cents. This would imply a payout ratio of below 45%. In other words, 45% of its earnings in the first quarter was paid out as dividends.
However, with a high CET1 ratio and ROE of above 18%, there could be room for DBS to raise the dividend payout ratio further.
There is also potential for UOB and OCBC to increase their dividends when they declare their interim dividends next quarter with the higher earnings achieved in the first quarter.
OCBC management has shared that the dividend payout ratio would be “at least” 50%. UOB management was more conservative, noting that the dividend payout ratio could be 50%.
Putting this together, DBS and OCBC appear to have more potential for dividend upside amongst the Singapore banks.
Overall, we might still see some share price weakness in the Singapore banks in the near term.
However, for investors who are willing to wait out the current economic uncertainty, while earning some dividend income in the meantime, it might be worth adding DBS and OCBC to your watchlist!
Apart from banks, Singapore REITs also offer a dividend yield above the Straits Times Index. Find out what we would consider before investing in Singapore REITs.
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