Readers who have been following me over the past year or so would probably have heard me share on an investment idea of the Singapore Banks during an online interview with Stanley. You may find the replay of it here.
Furthermore, in our last post, I shared a couple of top ideas where the company share prices have declined more than 20% since 17th January 2020, the start of the Coronavirus. Out of these 5 ideas, I mentioned 2 of our Singapore local banks – OCBC & UOB.
I am very thankful to have the opportunity of speaking at MoneyFM with Ryan Huang once again and in this interview, I was once again sharing on the Singapore Banks as an investment opportunity. I will post the replay version once its made available online.
“Be greedy when others are fearful” is a quote that is probably most often cited but yet rarely practised in the stock market. I understand that this investment idea might be quite contrarian; especially given how the brokerage houses have been downgrading the banks to Hold; however, what better time where we should we be greedy when all else are fearful of the banks?
In this article, I thought I summarise 3 key points on why I remain bullish on our Singapore banks.
Declining NIMs, Rising Net Income
One concern that I have constantly heard about because of the rate cuts, the banks will be making lesser money. After all, how banks make money is through the difference of charging businesses/individuals an interest rate and paying depositors a deposit rate. This is called the Net Interest Income (NII) and when you take this amount divided by the average interest-earning assets this is called the Net Interest Margin (NIM).
While these concerns are valid, investors forget that the other way banks make money is by gathering assets. This is the reason why despite NIMs falling the last 10 years, we still see OCBC’s net interest income rising as seen in the picture above. Majority of Singaporeans are still employed, saving a portion of their income in the Singapore Banks and as a result the Banks are able to lend more money despite NIMs dropping. Therefore, this is why the Banks are still able to increase their Net Interest Income, despite NIMs declining.
No matter how good the company may be, it all boils back down to valuations. After all, a good company at a bad price can still result in a bad investment.
Using OCBC as an example, one would be able to see how cheap the bank’s valuations are at this current point in time.
As seen, the current P/B ratio of 0.79x is an all time low even when compared to the past few crisis – 2008 Global Financial Crisis and 2016 Singapore Property Downturn. Furthermore, the current decline in valuations is due to the Novel-Global Recession. Yet, one has to question that for current valuations to be traded below that of the Global Financial Crisis, does it mean that the fundamentals of our banks are worst off than before? I am of the belief that this is not true and our banks have cleaned up the balance sheets greatly and are very well capitalised at this point in time.
Above 6% Dividend Yield
Apart from the cheap valuations, the Singapore Banks on average are traded at an attractive dividend yield of above 6%; where to be more accurate, OCBC’s dividend yield is currently 6.8%.
The improvement in CET1 Capital Ratio over the years decreases the likelihood of a trim in dividends as this gives the bank ample room above the regulatory requirements to pay dividends. The last dividend cut undertaken by any of the banks was during the Global Financial Crisis. However, the current situation is not comparable to the Global Financial Crisis as mentioned above, where the global financial system collapsed when credit quality of the banks came under pressure. Furthermore, the Singapore Banks are currently maintaining a CET1 Capital Ratio of above 14%, well above regulatory requirements set by the Basel III and MAS. The Singapore Banks current CET1 Capital Ratio is even higher than the Tier 1 Capital Ratio from Global Financial Crisis, where CET1 Capital Ratio were yet to be introduced.
While the outlook may look gloomy at this point in time; however, looking back each crisis that has happened, at which point were investors not pessimistic and gloomy too?
The Singapore Banks’ valuations are cheap but it may get cheaper as the economy worsens and investors feel more pessimistic. In the short run, I have no idea as to where the stock prices will end up. However, in the long run, I am quite confident in the bank’s fundamentals and growth prospects, the balance sheet are very well capitalised and the compounding power is strong and predictable. The Singapore Banks have historically achieved an annualised ROE of 11%.
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The information provided by InvestingNook serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock.
Disclaimer: The Author has vested interest in OCBC & UOB at the time of writing.