FY23 has been a year of high interest rates and a relatively robust economy. This means that the banking industry is one of the clear winners. With a strong loan book and relatively high net interest margin, banks have generated record revenue growth and profits.
| DBS | OCBC | UOB | |
| Market Cap ($’bn) | $87.5 | $60.4 | $47.6 |
| Revenue Growth (% YoY) | 22% | 20% | 20% |
| Net Profit increase (% YoY) | 26% | 27% | 25% |
| Cost/income ratio (%) | 39.9% | 38.7% | 41.5% |
| Net interest margin (%) | 2.15% | 2.28% | 2.09% |
| NIM growth (%) | 0.40% | 0.37% | 0.23% |
| CASA ratio (%) | 53.4% | 48.7% | 48.9% |
| Non performing loans (%) | 1.1% | 1.0% | 1.5% |
| Capital adequacy ratio | 14.6 | 15.1 | 13.4 |
| Earnings per share ($) | $3.87 | $1.55 | $3.34 |
| Dividend per share ($) | $2.16 (prospective) | $0.82 | $1.7 |
| Dividend Yield (%) | 6.4% | 6.3% | 6.0% |
| Return on equity (%) | 18.0% | 13.7% | 14.2% |
| P/B ratio | 1.46 | 1.10 | 1.09 |
| P/E ratio | 8.6 | 8.4 | 8.5 |
Strong 2023 performance
The three Singapore banks have performed well, with similar revenue growth ranging about 20% and a corresponding net profit increase of about 26%. In summary, 2023 was a strong year for banks.
This isn’t unexpected, as over the year, the combination of a higher interest rate environment and a stable, benign economy meant that the entire business franchise delivered healthy performances and bolstered the bank’s core profitability.
However, when we looked at the second-half (2H) performance vs the first half’s (1H’s), it is clear that the year-over-year (YoY) growth was strong in the first half, as the high-interest environment took a toll on many companies by the second half of 2023 (2H23), slowing down growth.
When comparing 2H23 to 1H23, sequential profit was lower in 2H23 for DBS & UOB. OCBC was the only bank that was able to eke out a small sequential revenue and profit increase. This is a sign that 2024’s growth will probably be lacklustre.
Read more about their past quarter performances here:
DBS vs OCBC vs UOB 3Q23 Results
Slowdown expected in 2024
A slowdown is expected on a global basis and in most major economies. This is because the elevated interest rates do no favours to businesses who are seeking to refinance their loans or take on more loans for business expansions.
The banks are cautiously optimistic as the global economic outlook remains uncertain in the near term, but there are expectations for Southeast Asia to continue to be a bright spot. The ASEAN economy has good potential and tailwinds, driven by improved domestic demand, robust tourism recovery and strong investment flows into the manufacturing sector as companies reconfigure their supply chains.
Net interest margin has probably peaked
All three banks record substantial net interest margin (NIM) growth backed by a high current account-savings account (CASA) ratio. In Singapore, the banks have a CASA ratio of around 50% which provides the bank with a substantial pool of cheap funds.
The CASA ratio measures the proportion of a bank’s total deposits that are held in the form of current or savings account. Given the low or zero interest paid on such accounts, a high ratio is usually good for the bank.
Interest rates have probably peaked
This is now viewed as a matter of fact, and rates are eventually expected to come down. In the interim, the banks are affected by the higher cost of funds, which they cannot pass through to their customers due to the competitive environment.
Should interest rates be forced down as a consequence of weaker economic conditions, it is also unlikely for the banks to maintain such a high NIM spread.
Increase in dividends
In Singapore, the three banks are confident of their core profitability, as they have raised dividends this year. All three banks are currently distributing between 50-55% of their earnings as dividends.
While dividend growth may not be linear, the Singapore banks are expected to continue increasing dividends over time from regional expansion and internal growth.
UOB and DBS have acquired a few Citibank Asia assets in the region while OCBC has been expanding in Indonesia and is expected to carry out more acquisitions, as its balance sheet has the most capacity for deals.
Should you buy Singapore banks now?
The Singapore banks are viewed as a stable cornerstone of many portfolios. Although the Singapore banks are not expected to perform as well in 2024 as compared to 2023, it is a question of valuation and holding period. The banks currently yield between 6.0% to 6.4% and is an attractive proposition to dividend investors.
In evaluating the options, considering the banks’ valuations and dividend yields, we think OCBC is the standout candidate. Its favourable combination of a lower valuation and a high dividend yield offers an attractive proposition, aligning well with those seeking both affordability and income potential.
OCBC also has the best key metrics such as the cost to income ratio, net interest margin, non performing loan and capital adequacy ratio.
Read more about the Singapore Bank Valuations in this report:
Singapore Banks FY23 Full Report
Maybe, consider this finance stock instead?
The best share price performer on the Singapore exchange in the financial sector is not one of the three banks. iFAST is the best 1 year performer with a +40% increase while the 3 banks record lacklustre gains of around -5% to +5%.
This was off the back of iFAST growing net profit of 340% YoY in FY23 to $28 million on the back of a 23% increase in revenue to S$257 million. Its asset under administration, a key measure of scale, grew nearly 14% to almost $20 billion. In 4Q23, net inflows remained positive and stood at S$334 million.
The increase in profitability was driven by initial contributions from the ePension division as well as improvements in the core wealth management platform business.
Going forward, as part of its 3-year plan, iFAST targets to make solid progress as a global digital banking and wealth management fintech platform, accelerate Hong Kong growth and effectively deliver on ePension services while developing innovative fintech services that are complementary to digital banking and wealth management platforms.
On an overall basis and barring unforeseen circumstances, the Group expects 2024 to see robust growth rates in revenues and profitability compared to 2023.
iFAST Global Bank is also expected to post a reduced loss in 2024 compared to 2023, targeting to breakeven by 4Q2024, driven to a large extent by growth in net interest income as the deposit base continues to grow. iFAST Global Bank is expected to become an important growth driver for the Group in 2025 and beyond.
Such a strong outlook contrasts with the cautiously optimistic outlook that the banks are taking, as they are much larger in scale, and are more closely aligned with the performance of the economy.
p.s. if you want to learn how to analyse and find the best stocks to buy, Alvin shares our strategy at this live webinar.