Singapore Bank Stocks Are at a Year High: Can They Rise Further?
The share prices of Singapore’s three local banks have been on a tear.
Both United Overseas Bank Ltd (SGX: U11), or UOB, and OCBC Ltd (SGX: O39) are trading close to their year-highs, and are up 13.3% and 17.4% year to date, respectively.
DBS Group (SGX: D05) has not only hit a year-high, but has also chalked up a new all-time high of S$30.87 in early July. Its shares are currently up around 16.7% year to date.
The performance of the three lenders blows past the rise of the benchmark Straits Times Index (SGX: ^STI), which has risen just around 9% during the same period.
All three banks have reported improved sentiment arising from increased levels of COVID-19 vaccinations around the world.
Business conditions have also eased after the tough challenges faced last year.
Investors are feeling ebullient on banks’ prospects, but are these sentiments justified?
Can bank stocks rise further, or are they ripe for a long-awaited pullback?
Stabilised net interest margin
One key area to observe is the banks’ net interest margin, or NIM.
The NIM represents the spread a bank earns from doling out loans to clients versus the interest rate it needs to pay to depositors.
The higher the NIM is, the more money a bank earns.
The good news is that NIMs for all the banks has stabilised over the past three quarters.
OCBC, in its latest fiscal 2021 first quarter (1Q2021) earnings, reported that NIM remained stable at 1.56% quarter on quarter.
Likewise, DBS’ NIM seems to have bottomed at 1.49% over the last two quarters, while UOB’s NIM has flattened at 1.57% over the same period.
That’s a positive sign.
Central banks around the world have dropped interest rates since last year to stimulate economic growth, and this tapering seems to have trickled off.
However, with inflation rearing its ugly head in the US recently, the Federal Reserve may even consider raising interest rates, albeit cautiously.
Rising fee income
Although net interest income has declined in line with the fall in interest rates, rising fee income has compensated for some of this drop.
For 1Q2021, OCBC reported a 20% year on year rise in non-interest income. This rise was driven by a jump in wealth management income from S$760 million to S$1.2 billion.
Assets under management (AUM) for its private banking division rose 18.3% year on year to US$123 billion.
Meanwhile, DBS has reported a record fee income of S$1.1 billion in its recent 1Q2021 results, and the bank expects full year fee income growth to hit double digits.
This surge in fee income is expected to continue as more people rely on the banks for investments and insurance, a trend accelerated by the pandemic.
Healthy and rising loan books
Yet another positive is that all three banks are reporting healthy loan books that are also rising year on year.
An increase in the number of loans contributes positively to net interest income even though NIM may remain stagnant.
OCBC has reported healthy repayment profiles for its relief loan portfolio, with only 2% of loans under moratorium, 92% of which are secured by collateral as of 31 March 2021.
Customer loans inched up around 0.2% year on year.
Things are looking a little better at DBS where the bank upgraded its full-year loan growth to mid-to-high single digits.
And for UOB, gross loans jumped by 5% year on year to S$293 billion.
Additional growth drivers
The banks are not standing still, either.
They are seeking other avenues of growth other than just fee income and loan growth.
DBS, for one, has been active in the acquisitions space.
Its acquisition of Lakshmi Vilas Bank in India last November is proceeding well.
Integration is proceeding well, with deposits rising 14% since the acquisition and gold loans growing by 4%.
The lender also acquired a 13% stake in Shenzhen Rural Commercial Bank for S$1.1 billion, adding more than five million retail customers and over 170,000 corporate customers.
Get Smart: Continue to monitor risks
As it stands, the banks are being lifted by tailwinds that could lead to higher profits.
A global recovery should also continue to boost loan growth and drive fee income increases.
However, risks remain in the macro economy.
The recent surge in infections related to the new Delta variant is concerning as it may once again depress economic growth and dampen consumer spending.
There’s also the lingering threat of the digital banks, which are slated to begin operations come early 2022.
UOB and OCBC will report their fiscal 2021 first half earnings on 4 August. Investors can then gain more clarity on the latest situation then.
If you could only buy one of these dividend stocks in August, which would you pick?
The pandemic survivor, Keppel DC REIT (SGX: AJBU)..
The property mogul, Frasers Logistics & Commercial Trust (SGX: BUOU)…
Or the blue chip darling, DBS (SGX: D05)?
This is the challenge we created for ourselves this month.
We asked the public to choose 3 stocks for us.
And we will be buying one of them.
Now, it might sound crazy to stake our money on the public’s opinion. But we’ve done our homework.
And on 29 of July, you’ll be able to watch our analyses live on a webinar.
We’ll break down each stock’s strengths, weaknesses, and potential to add thousands of dollars in our accounts.
We’ve never done this before, so you’re in for a treat. If you have any interest in dividend stocks, this webinar is for you.
Click here to register and reserve yourself a spot for free!
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Disclaimer: Royston Yang owns shares of DBS Group.
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