Singapore’s Big Three Banks And The New Normal

Retail investors who brought into bank stocks before Covid-19 struck would have been appalled at the drop in the value of their holdings during March 2020. A 25% drop in capital would not have been something to laugh about. Add in the shock of MAS requesting for local banks to cap their dividends, with no mention of when the cap would be lifted; a long winter for retail investors.

Thankfully, that period has well and truly passed us by. Investors who have held on to their shares throughout the pandemic, or even brought more would have been well-rewarded. A capital gain of 45% to 60% from it’s lows, alongside the return of 2019 dividend levels forecasts great returns for shareholders of the three local banks.

However, it’s clear for all to see that things have changed during the pandemic. Contactless payment methods and QR codes are now mainstream, more and more fintech players are entering the market, and interest rates have tumbled, following global trends. In such unconventional times, it’s crucial for investors to monitor the performance of their holdings, to ensure that the companies they own have adapted well to the new normal.

With the big three Singapore banks recently releasing their half-annual results, let’s take a look to see how they have been doing so far.


DBS Bank (SGX:D05)

During 2020 and 2021, the bank has been active in the acquisition scene, buying up stakes in Shenzhen Rural Commercial Bank and Lakshmi Vilas Bank. The Indian acquisition is of particular interest as it greatly increases the customer base of DBS in India.

For 1H 2021, DBS has managed to increase their net profit by 54% year-on-year. This was mostly due to Fee Income which increased by 20%. This increase also helped to mitigate the effects of a slightly lower Net Interest Income due to lower interest rates. The 95% drop in funds catered for allowances also helped greatly.

Net Interest income also seem to be bottoming out as the declines are becoming less prevalent. Loans demand is also improving, likely due to the lower interest rates. The bank sees a 6% increase in loans as compared to 1H 2020.

The bank’s Gross Fee Income is up 19% year-on-year, mostly due to the surge in Wealth Management Fee Income. Wealth Management Income is derived from Unit Trusts Fees, Insurance, and Investment Products sold by the bank.

The bank has observed a slight increase in Non-Performing Loans, but thankfully the increase in NPLs is minimal and is still manageable for the bank.

With these commendable metrics, DBS Bank has resumed the paying out of pre-pandemic dividend levels, paying out 33 cents per share to investors. This is a payout ratio of about 50% for Q2 2021.


OCBC Bank (SGX:O39)

The bank has been focused on building up it’s digital backbone to compete with digital banks, and has also started to offer more China and Hong Kong based ETFs to investors through it’s asset management arm, Lion Global Investors.

OCBC experienced a 86% surge in Net Profit for 1H 2021 year-on-year. This can be attributed to the contribution from Wealth Management (25% YOY) and revenue from it’s subsidiary, Great Eastern Holdings (111% YOY). OCBC also experienced a slight drop in Net Interest Income for 1H 2021 (7%) YOY.

For OCBC, Net Interest Margins and Net Interest Income have stayed relatively constant for the last few quarters. Loan demand was relatively steady as well.

The company’s subsidiary, Great Eastern Holdings did particularly well in Q1 2021, with a Non Interest Income growth of more than 100% QOQ. However, it seems to be short-lived as income generated from the subsidiary has retreated to the norm in Q2 2021. Wealth Management Income was the main increment driver for Fees and Commissions Income for 1H 2021, increasing by 25% YOY.

Total Non Performing Loans amounts and ratios have held steady since 2021. The bank has also cut back on allowances by up to 70% YOY.

OCBC’s subsidiaries in Hong Kong/Macau and Indonesia are slightly worst off, having decreases in net profit ranging from 9% to 6%. The Malaysia operations are doing much better, increasing it’s net profit by 39% YOY. Of note is that customer loan demand and customer deposits are relatively steady.This likely means that OCBC is still maintaining it’s market share of banking services in these countries.

OCBC has resumed it’s Pre-Covid dividend policy of 25 cents per share for 1H 2021. This translates to a payout ratio of 42%. Shareholders should see a return to 2019 dividends if the bank follows it’s policy of paying out a higher dividend for 2H 2021.


UOB Bank (SGX:U11)

UOB has been busy rolling out it’s new digital bank offering, TMRW to consumers in Thailand and more recently, Indonesia. The bank hopes to target millennials and young professionals and grow organically across ASEAN.

For it’s financial results, 1H 2021 Net Profit was up 29% year-on-year, owning to an increase in Net Fee Income of 28%. Net Fee Income increase can be attributed to an increase in Wealth Management and Loan-related fees.

The bank also experienced a step-up in Gross Loans in Singapore and Greater China, which helped UOB’s Net Interest Margins and Net Interest Income produce slight increases over the last few quarters.

UOB’s overseas franchises in Thailand, Indonesia, and Greater China handed out higher profits to help support the bank. However, other parts of Asia such as Vietnam, Myanmar, and Brunei are not doing as well, dragging down profit from these regions by 30%. In total, the bank’s overseas franchises contributes 48% of the group’s operating profit.

The bank observes a surge in NPAs and Write-offs for Q2 2021, nonetheless this should be a one-off event as the non-performing loans were attributed to 3 corporate accounts. NPL ratio and amounts as a whole are still uneventful. UOB has also decreased it’s total allowance for loans by up to 50% year-on-year.

With the lifting of dividend caps by MAS, management intends to resume the payout of dividends, at 50% payout ratio. This translates to 60 cents dividend per share for 1H 2021.


Conclusion

It’s hard to deny that the entrance of fully-digital banks with deep pockets would likely pose risks to the incumbents. However, banking is more than just a transactional event; it requires trust between both parties, and has a strong element of service quality imbued in it as well.

Investors of the three banks should continue to scrutinize the transformation of their holdings to ensure they have the ability to respond to incoming threats to their business model.

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