How do Singapore banking stocks compare with overseas banks? Which banking stocks should investors be banking on now?
Singapore’s 3 listed banks, namely DBS, UOB and OCBC bank dominate the local banking scene and are major components of the STI index, with about 40% of total weight going to these blue chip banking heavyweights. Performance for first 5 months in 2018 for the 3 banking stocks has been impressive, following the strong recovery momentum from 2017 with DBS gaining 18%, OCBC gaining 5% and UOB gaining 11%. Singapore banks weathered the 1997 Asian Financial Crisis, 2008 Global Financial Crisis and most recently the 2015 oil market slump and China devaluation and emerged healthier and stronger than most regional banks in the South East Asia region.
The following table highlights Singapore’s banking giants as compared against regional overseas peers in terms of key valuation metrics such as dividend yield and P/B ratio.
Singapore banks are trading at a higher than average dividend yield, lower than average P/B ratio. The largest banks of the region, DBS Banks is currently trading at elevated P/E of 17.5 times historical earnings, higher than regional average while OCBC and UOB are both trading a cheaper P/E. The above signal slight undervaluation of Singapore Banks compared to banking peers operating within the South East Asian closely knit economic region. Singapore banks are governed by strict compliance laws, which saw tightening regulations since the closure of 2 private banks and penalties imposed relating to 1MDB financial transactions. With the high governance standards and healthy capital base, Singapore banks remain a safe haven among income investors and are investor’s best pick for stability of income and sustainable earnings growth.
Banking sector outlook is forecasted to be rosy throughout the year 2018. More upside is in the cards for local banking stocks, with the main theme being higher net interest income and higher fee based income from wealth management segment. Valuations for local banking stocks have further upside due to its below par 1.5 average price to book ratio, a notch lower than regional banks. The worst within the oil and gas sector downturn is now a thing of the past and banks are sailing through steady waters with the sector stabilizing. Oil prices has notched up to USD70 per barrel as at May 2018.
Investors can bank on DBS for capital gains and stable income yield as their choice investment stock. DBS bank sits atop the banking pack and remains a solid blue chip buy that investors can add to their investment portfolio. One key investment merit for favouring DBS bank is its lean cost to income ratio. Interest margins are expected to climb on the back of two major tailwinds namely stabilization of oil and gas sector and rising interest rates. Net interest margins rose by 7 basis points and loan growth is expected to increase by at least 7% for 2018. Final dividend rates were raised and special dividend was announced. Investors can look forward to higher earnings and potentially higher dividends which at current levels are still attractive giving and effective yield of 3.21% per annum. DBS bank recorded an impressive 26% jump in net profit with the recently release q1 2018 financial results, outperforming analyst estimates. Earnings jump were buoyed by robust net interest income growth of 16%, as a result of higher net interest margins. NPL formation hit a 4 year low, as evidenced by the oil and gas sector ongoing recovery. With its large asset loan base, higher net interest margins would benefit DBS bank greatly.
OCBC bank is another top banking sector pick with aggressive acquisition plans to beef up its wealth management department. November 2017 saw the completion of acquiring National Australia Bank’s private wealth department. 2017 results were impressive where net interest income grew 14% and total net profit grew 19%. Dividends were raised in view of excess capital and much improved financial performance. Moving forward to 2018, net interest margins would continue to expand with expected faster pace of interest rate hikes. OCBC’s oil and gas loan book has been well contained and the sector may have bottomed out. OCBC’s Q1 2018 earnings were no slouch, rising 29% compared to prior quarter, but missing analyst estimates. This has hit price growth for 2018, and investors can take advantage of lagging performance to accumulate OCBC bank. Among the key investment merit for OCBC includes highest return on risk weighted assets at 2.1%, lower cost to income ratio compared to UOB Bank and strong wealth management franchise with largest historical AUM growth over the past 7 year from 2010 to 2017 topping DBS and UOB. Its insurance arm Great Eastern saw healthy operating profits growth as well.
Conclusion
Investors could be well rewarded in the long term by investing in the above banking stocks. Banks all over the world, post 2008 Global Financial Crisis are in healthy shape, with expanding interest income, solid compliance controls governing the loan growth at a sustainable pace. Singapore listed banks are checks all favourable investment criteria, namely solid dividend yield, strong balance sheet and sustainable profit growth and most importantly reasonable valuations that are not out of line among regional peers. It definitely fits the definition of a wonderful business at a fair price, as made famous by legendary investor Warren Buffett in his advice to stock investors in their pursuit for investment bargains. Investors can bank on the hardworking management on delivering the required investment returns for the coming years.
(By Chee Hoong Chan)
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