Perhaps the worst kept secret in the financial world today is that the U.S. Federal Reserve wants to bring the benchmark overnight borrowing rate lower this year.
A lower rate means that banks will have to lower their loan rates, resulting in a compression of the Net Interest Margin (NIM) - the lifeblood of their profit.
For the uninitiated, NIM is the difference between the rate banks charge their borrowers versus the rate banks pay to depositors. Banks cannot afford to lower their deposit interest rate too much. Otherwise, depositors will flock to another bank. This leads to the dilemma above.
Accordingly, broker analysts have started to downgrade their view of the local banking sector, as reported [here] and [here].
However, it is my belief that the Singapore banks remain an attractive investment proposition.
DBS 9M23 total income was S$15.2B (up 27% y/y); UOB was S$10.5B (up 28% y/y) over the same period; and OCBC was S$10.2B (up 24% y/y). 9M23 net profit was S$7.89B (up 35% y/y), S$4.3B (up 26% y/y) and S$5.4B (up 32% y/y) respectively. Even if the NIM is compressed come 2H24 and loan growth stalls, the banks will still be highly profitable.
Unlike other global banks which suffered significant losses due to investment and trading, our local banks are cautious risk-takers and big brother MAS is always watching over their shoulder. I wouldn't expect any rouge trader to bring the house down.
I read [here] that the three banks had the highest S$2.6B of net institutional selling in 2023. When the professionals decide to park their funds elsewhere, they sell by the buckets and price retracement occurs. This presents an opportunity for us retail investors to buy the bank stocks cheaper.
If you are big on S-Reits, I recommend to get some S-Banks (Singapore banks) exposure too, never mind that the quantum is large for the lot size. The banks are in a strong position to grow and increase their payout over the long run.
If you worry about over-paying, you can use the Price-to-Book Value (P/B) Ratio as a yardstick to determine whether the bank stock is cheap or expensive. The P/B ratio measures the market's valuation of a company relative to its book value. For banks, it is considered a less volatile measure compared to the Price-to-Earnings Ratio.
The table below shows the P/B ratio for UOB, and is taken from Morningstar, which you can access for free [here]:
UOB is currently trading at a P/B ratio of 1.04, close to its 5-year average of 1.05. In layman terms, it is not exactly expensive *relative* to its history. (Remember: valuation needs to be evaluated in a relative manner, either against its peers or compared to historical data.)
Circling back to my opening paragraph, all these institutional selling is banked on - pardon the pun - the U.S. Fed cutting interest rate. What happens if U.S. inflation reverse its trend and head back up? In all likelihood, the Fed will maintain the current rate, which is a boon for the banks.
Hope the above information is useful.
As usual, here is a disclaimer: I hold shares in DBS, UOB and OCBC Bank. This post is NOT a recommendation to buy any stock. Please do your homework and review your financial circumstances before making any investment decision.
A lower rate means that banks will have to lower their loan rates, resulting in a compression of the Net Interest Margin (NIM) - the lifeblood of their profit.
For the uninitiated, NIM is the difference between the rate banks charge their borrowers versus the rate banks pay to depositors. Banks cannot afford to lower their deposit interest rate too much. Otherwise, depositors will flock to another bank. This leads to the dilemma above.
Accordingly, broker analysts have started to downgrade their view of the local banking sector, as reported [here] and [here].
However, it is my belief that the Singapore banks remain an attractive investment proposition.
DBS 9M23 total income was S$15.2B (up 27% y/y); UOB was S$10.5B (up 28% y/y) over the same period; and OCBC was S$10.2B (up 24% y/y). 9M23 net profit was S$7.89B (up 35% y/y), S$4.3B (up 26% y/y) and S$5.4B (up 32% y/y) respectively. Even if the NIM is compressed come 2H24 and loan growth stalls, the banks will still be highly profitable.
Unlike other global banks which suffered significant losses due to investment and trading, our local banks are cautious risk-takers and big brother MAS is always watching over their shoulder. I wouldn't expect any rouge trader to bring the house down.
I read [here] that the three banks had the highest S$2.6B of net institutional selling in 2023. When the professionals decide to park their funds elsewhere, they sell by the buckets and price retracement occurs. This presents an opportunity for us retail investors to buy the bank stocks cheaper.
If you are big on S-Reits, I recommend to get some S-Banks (Singapore banks) exposure too, never mind that the quantum is large for the lot size. The banks are in a strong position to grow and increase their payout over the long run.
If you worry about over-paying, you can use the Price-to-Book Value (P/B) Ratio as a yardstick to determine whether the bank stock is cheap or expensive. The P/B ratio measures the market's valuation of a company relative to its book value. For banks, it is considered a less volatile measure compared to the Price-to-Earnings Ratio.
The table below shows the P/B ratio for UOB, and is taken from Morningstar, which you can access for free [here]:
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| Source: Morningstar |
UOB is currently trading at a P/B ratio of 1.04, close to its 5-year average of 1.05. In layman terms, it is not exactly expensive *relative* to its history. (Remember: valuation needs to be evaluated in a relative manner, either against its peers or compared to historical data.)
Circling back to my opening paragraph, all these institutional selling is banked on - pardon the pun - the U.S. Fed cutting interest rate. What happens if U.S. inflation reverse its trend and head back up? In all likelihood, the Fed will maintain the current rate, which is a boon for the banks.
Hope the above information is useful.
As usual, here is a disclaimer: I hold shares in DBS, UOB and OCBC Bank. This post is NOT a recommendation to buy any stock. Please do your homework and review your financial circumstances before making any investment decision.
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Hi SS, totally agree with you! I believe the trio of Singapore banks have been perpetually undervalued and will continue to do well despite potentially lower NIM. Considering that we live in a highly leveraged world today, increase in loan volume would probably be enough to offset the NIM reduction. Sadly not enough capital for now so am unable to buy a lot of DBS.
ReplyDeleteHello Passive Loss SG,
DeleteWell said! Most of us don't have a lot of money to buy DBS at once, so I would usually take tiny bites at appropriate time. Don't lose hope!