The three local Singapore banks, DBS, OCBC and UOB are the crowd favourites amongst investors in Singapore.
Previously, Zhi Rong covered the 1Q23 results of the three local Singapore banks and concluded that the local banks have performed well and are expected to experience consistent earnings on a quarterly basis in the shorter term, thanks to the refinancing of loans. However, the near term prospects for these banks may be uncertain and investors should exercise prudence when considering investing in banks.
Here I share why I will not buy the banks at this point in time, even though share prices have come down a little.
1) Key Singapore Bank Fundamentals
Net Interest Margins (NIM)
In the recent quarter, the 3 banks recorded net interest margins (NIM) between 2.12% and 2.3%.
However, of the 3 banks, only 1 bank, DBS recorded a NIM growth of 8%. OCBC recorded a NIM decline of 0.01% and UOB recorded a decline 0.08%.
DBS noted that they think NIM has peaked for them. Hence, it may be safe to say that NIM may have peaked for all 3 banks. Although NIM decline may be gradual in the next quarter, the issue is for subsequent quarters as well as loan growth.
Loan growth
Loan growth is likely to slow down. All 3 banks provided a target of low to mid single digit percentages growth in its loan book for 2023.
However, there are signs of slowing.
OCBC recorded growth in non-trade corporate loans and mortgages which offset lowered trade loans but maintained its 2023 target of low to mid single digit percentages loan growth.
DBS also provided a loan growth target of 3-5% as non-trade corporate loan pipeline healthy. Housing loan bookings have recovered but may see some impact from latest cooling measures.
Non performing loan ratios for DBS & UOB stood at 1.1% and 1.6% respectively, unchanged from the previous quarters while OCBC’s improved by 0.1% QoQ to 1.1%.
For the less optimistic, this could indicate that provisions may increase over the next quarters as banks would have to build up their provisions as the economy slows.
2) State of Singapore’s economy and interest rates cycle
Based on estimates, the Singapore economy grew by a mere 0.1% YoY in 1Q23, slower than the 2.1% growth recorded in the previous quarter. On a QoQ basis, the Singapore economy contracted by 0.7%, a reversal from the 0.1% expansion in 4Q22.
Singapore’s 2023 GDP is expected to grow between 0.5% and 2.5% for the full year, in contrast to the 3.6% seen in 2022. If Singapore’s 2Q23’s GDP growth remains weak, GDP growth expectations will be revised downwards.
Headline inflation for Singapore stood at 6.3% in February, Singapore’s central bank, The Monetary Authority of Singapore (MAS) expects inflation to stay elevated over the next few months.
In the MAS’s April 2023 statement, the MAS announced that it would halted its tightening cycle, maintaining its exchange rate policy band after five straight decisions to tighten.
Halting the tightening cycle means that the Singapore Dollar’s trend appreciation will slow down or reverse. This will lead to higher domestic interest rates.
In Singapore, as the MAS manages the exchange rate, interest rates are largely determined by foreign interest rates. Domestic interest rates trend up with US interest rates, although it has typically been below US interest rates as it reflects market expectations of a trend appreciation of the Singapore dollar over time.
In a slowing economy, increase to interest rates will not only slow down growth but also increase credit risks.
3) Singapore Bank Valuations
| DBS | OCBC | UOB | |
|---|---|---|---|
| Price to Book | 1.45 | 1.04 | 1.17 |
| Price to Book Median (5 years) | 1.34 | 1.07 | 1.14 |
The banks are all trading close to or above their median P/B ratio valuations and we would look to acquiring them should they fall 10% to 15% below their median.
The dividend yield for all 3 banks are in a 5% to 6% range, this would not be enough of a buffer should a bear market hits and stocks take a 20% hit.
Closing statements
Fundamentally on a long term basis, there is absolutely no doubt that the three local Singapore banks are ones of the best plays for the Singapore market as the performance of these banks are closely tied to the Singapore economy.
However, we think it is not the right time yet as the key fundamental data for the banks look like they have peaked and there are even some indicators of the commencement of a dip.
From a macro perspective, it is clear that the Singapore economy’s growth for 2023 will be lacklustre amidst high inflations and high interest rates. This puts a risk on the banks‘ growth as well as on the credit quality of existing assets. The trading books of the banks may also be affected if the stock and bond markets underperform.
With an impending downturn, short term investors are unlikely to bite as the risk to return ratio may not look attractive.
Valuations of the banks are not attractive for long term investors who typically look to purchase at below long term median valuations.
This is why I still wont buy DBS, OCBC or UOB yet.