As the backbone of Singapore's economy, the banking industry is pivotal in driving growth and prosperity for the little red dot. With the big three local banking stocks making up the top holdings of the Straits Times Index, one might say that DBS, UOB and OCBC are largely responsible for the long-term growth of the Singaporean economy. Whether you're looking to play it safe by investing in local blue chip stocks that have low betas or are seeking diversification for your US-heavy portfolio, local bank stocks remain a popular option given that the banks are the powerhouse that Singaporeans are highly familiar with. Wondering what's the difference between the local banks? From exploring their investment strategies to highlighting their differences, our Singapore bank stocks review will showcase everything you'll need to know before deciding whether to buy DBS, OCBC or UOB stocks for your own portfolio.
What Are Singapore Bank Stocks?
Singapore bank stocks represent shares of ownership in banks operating in Singapore. The big three local banks include shares for DBS Group Holdings, United Overseas Bank (UOB) and Oversea-Chinese Banking Corporation (OCBC). These stocks are traded on the Singapore Exchange (SGX) and allow investors to participate in the growth and profitability of the country's banking sector.
By and large, Singapore’s local bank stocks are favoured for their steady dividend returns and stability in the face of major volatility because of their low beta. As they tend to remain stable regardless of major index movement, DBS, OCBC and UOB shares are preferred among investors with a long investing time horizon and enjoy the reward of a quarterly dividend payout.
Local Bank Market Trends: What Impacts the Singapore Bank Stocks
The Singapore banking industry is influenced by several key market trends that investors should be aware of before making decisions:
Digitalisation of Services
Banks in Singapore increasingly leverage technology to provide seamless digital banking services, making it convenient for customers to transact and manage their finances online. This helps to reduce operational costs and offer better customer service.
The Monetary Authority of Singapore (MAS) is the main regulatory body that oversees financial institutions in Singapore. As such, they are responsible for setting regulations and guidelines governing banking operations in the country. MAS is essential in ensuring the banking system remains sound and stable while protecting investors from irresponsible banking practices.
Credit Risk Management
Credit risk management is an integral part of Singapore's banking system as it helps to reduce the amount of non-performing loans in a bank's portfolio. Banks employ various measures such as loan monitoring and stress tests to manage their credit risks effectively.
The quality of a bank's assets, including loans and investments, affects its financial stability and risk profile. While the idea of sitting on too much cash can be seen as a negative since it's money not being put to work, being cash rich may be a huge plus when fears of bank runs abound.
There is a growing focus on sustainable finance and environmental, social, and governance (ESG) initiatives in the banking sector, aligning with Singapore's commitment to responsible and ethical practices.
Interest Rate Fluctuations
The global economic environment and monetary policies impact interest rates, affecting the profitability and performance of banks. As interest rates rise, banks make more money by taking advantage of the greater spread between the interest they pay their customers and the profits they earn by investing. However, said interest rates also strain bond prices as bond yields rise alongside interest rates, which can be a pain for banks with bond-heavy portfolios.
Willingness to Innovate
Banks that invest in cutting-edge technology gain a competitive edge in attracting and retaining customers. By broadening their horizons and exploring the newest forms of tech, the reach towards retail and institutional investors is significantly increased. For example, UOB embraced the metaverse and blockchain technology by launching a virtual art gallery within the Decentraland metaverse.
Risks Involved in Investing in Singapore Bank Stocks
As with any investment, Singapore Bank Stocks have their fair share of risks. It's essential to be aware of these risks before making investment decisions:
- Market Risks: Typical fluctuations in the stock market can lead to variations in the value of Singapore bank stocks. Although they don't match the fluctuations of US tech stocks like Amazon and Alphabet, there can still be substantial price movements in the event of bank-related news. The most recent example would be the American bank runs that caused a scare among Singapore bank stocks.
- Credit Risks: While Singapore banks have the reputation of being well-managed and risk-averse, they still face the risk of defaults on loans and other credit-related products, which could impact overall profitability. For now, these fears have been kept at bay thanks to frequent stress tests and conservative guidance from MAS.
- Regulatory Risks: Regulation changes can affect banks' operations and financial performance. An example of this would be the case of MAS imposing additional capital requirements on DBS due to deficiencies in incident management, which will impact DBS' revenue as more capital has to be set aside as reserves.
- Economic Risks: Economic downturns can lead to reduced business activity and increased loan defaults. This possibility of loan delinquencies could affect the bank's liquidity down the line.
- Currency Risks: Banks with significant international operations may be exposed to currency fluctuations.
Comparing DBS, OCBC & UOB Stocks
When investing in Singapore bank stocks, the three big players are DBS Group Holdings, United Overseas Bank and Oversea-Chinese Banking Corporation. Let's take a look at their unique characteristics and crit investments:
DBS Group Holdings Ltd (SGX: D05)
DBS is the largest bank in Singapore and has garnered a reputation as one of the best banks in Southeast Asia, with total assets worth more than S$743B as of December 2022. As the leader of the big three Singapore local banks, expectations are undoubtedly high for DBS to further strengthen its fundamentals while continuing to explore avenues of growth and revenue diversification. From consistently exceeding return on equity numbers to announcing record profit numbers on an annual basis, DBS is likely showing no signs of slowing down despite being a mature bank. Fundamentals aside, DBS is also pursuing areas of sustainability as it seeks growth while championing ESG targets like lower carbon business models and championing social enterprises.
DBS' latest quarterly earnings revealed a record S$2.69B profit as higher interest rates continued to lift its margins despite muted loan growth. This was in part due to the continued interest rate hikes by the US Federal Reserve, which has contributed to higher-than-expected net interest margins of 2.16% and helped to drive income growth. Despite being the largest bank in Singapore, analysts have highlighted how DBS may now be a value buy. DBS' stellar earnings have resulted in its shares possessing a PE ratio of 8.89, which effectively makes DBS shares the most undervalued Singapore bank stock of the big three local banks.
Oversea-Chinese Banking Corporation Ltd (SGX: O39)
OCBC is the second largest bank in Singapore, with total assets of more than S$559B as of December 2022. OCBC primarily focuses on providing banking services to corporate clients, private banking and institutional banking. It has a strong presence in regional markets, ranking Greater China as its second most profitable region. Regarding investment style, OCBC tends to rely more on conservative debt investments than equity investments. Interestingly, non-interest income is a significant portion of OCBC's overall group income levels. This is primarily due to their subsidiary Great Eastern which contributes to the group's income with revenue from life and general insurance. During the pandemic, non-interest income peaked, making up 43.1% of OCBC's income. While this amount has declined in recent quarters, OCBC's popularity among investors and traders might still be high as the focus is on OCBC's high dividend yield.
With the dividend yield being 6.18% for this fiscal year, long-term investors may see buying OCBC shares as the best bang buck for their buck because they're rewarded for their buy-and-hold approach. Top of their stellar recent Q2 earnings report may make OCBC a solid local bank stock to consider as they achieve record high profits of S$1.71B for the first half of 2023.
United Overseas Bank Ltd (SGX: U11)
UOB is Singapore's third-largest bank, with total assets worth more than S$506B as of December 2022. Its core focus is consumer banking, corporate banking and wealth management services. UOB has aggressively expanded its market presence in the Southeast Asian region. Specifically, UOB has been focusing on boosting its digital bank services in Thailand and Indonesia. Regarding investment style, UOB tends to invest more heavily in equity investments than debt investments. While this can result in greater returns overall, it may also result in greater volatility, which can be seen in UOB's quarterly financial performance.
In UOB's recent Q2 2023 earnings, the bank reported net profits of S$1.4B, representing a 27% year-on-year increase and aligning with analysts' consensus. This is reportedly driven by UOB's investment income which has hit an all-time high. Notably, it's core net profit climbed 53% to S$3.1B, supported by robust growth in earnings across UOB’s diversified business franchise. While it was once lagging in the three-horse race among the Singapore bank stocks, UOB's stock price has been outperforming and is now giving OCBC a run for its money in terms of overtaking them in the amount of total assets.
What Investors Might Need to Consider Before Buying Local Bank Stocks
When it comes to investing in Singapore bank stocks, investors should consider several critical factors before making a decision. Here is a quick rundown of some of the key points:
- Understand the fundamentals and past performance of the banks you're considering investing in. These can include net interest margins, loan growth and total assets.
- Research on current market trends that could have an impact on a bank's performance.
- Analyse the company's financials and dividend track record to assess the stock’s potential for capital appreciation.
- Consider a bank's investment strategies when assessing its risk profile and profitability prospects since it will ultimately impact its expected growth.
- Keep an eye on regulatory developments, which can affect banks' operations and slowly suffocate the already slim profit margins.
- Consider each bank's exposure to regional markets and its ability to manage credit risk, as overleveraging may result in bank run fears. As OCBC and UOB explore further growth overseas, this might factor into revenue uncertainty down the line.
- Look out for any potential ESG and digital banking initiatives the banks may be taking on since this may result in a more significant inflow of revenue.
All these factors should be considered when making an informed decision regarding Singapore bank stocks so that investors can make a wise choice for their portfolios. With this review, you'll have all the facts necessary to determine which banks best fit your investment goals and risk appetite. With the correct information in hand, you can make a sound decision when it comes to investing in Singapore bank stocks.
The Bottom Line
All in all, we hope our insights have helped you, as an investor, to make sound and informed decisions when investing in Singapore's banking sector. From jumping on DBS' solid fundamentals to considering OCBC's dividend yield and UOB's aggressive regional expansion, investors are spoilt for choice when deciding which Singapore bank stocks to buy. By carefully evaluating each local bank's fundamentals and understanding the current market trends, investors will be better positioned to make informed decisions that benefit their portfolios.
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