Are Singapore banks underloved?

THE three local banks continue to underperform with DBS the worst off.

Year to date DBS is down 8 per cent while United Overseas Bank (UOB) is 5 per cent lower and OCBC has lost 3 per cent. The benchmark Straits Times Index is down 2 per cent for the same period. A yield of around 4 per cent doesn't seem to get investors excited.

But one would argue that banks as investments should be safely boring. In terms of safety the three score top marks; they are among the world's safest banks and rated along with the world's top banks.

DBS Bank has been crowned Asia's safest bank for the eighth year in a row.

In September New York-based trade publication Global Finance ranked DBS as the third-safest commercial bank globally, and the 12th-safest in the world. The world's 500 largest banks by total assets were ranked through an evaluation of long-term foreign currency ratings from credit rating agencies Moody's, Standard & Poor's and Fitch.

OCBC came in second in the magazine's Asia league table, and UOB fourth.

OCBC was ranked fifth in the top 50 safest commercial banks list while UOB was sixth. OCBC was rated 14th in the list of the world's safest banks overall and UOB 16th.

Global Finance publisher and editorial director Joseph Giarraputo said: "The safest banks ranking for 2016 illustrates the impact of some of the past year's major political and economic shifts, with low oil prices in particular having significant impact on Gulf economies."

This is the magazine's 25th annual ranking exercise. It's interesting that the ranking took in the impact of the low oil prices, not that the local banks have material exposure to the Gulf countries. But they are exposed to the stressed local and South-east Asian oil and gas firms, and the latest Q3 results show this up clearly while essentially confirming the fundamental strengths of the banks.

Earnings surprised on the upside despite sharply higher provisions set aside for more bad loans, the majority due to oil and gas.

Bank bosses warned that tough conditions will continue, though no one is expecting a collapse. DBS's CEO Piyush Gupta has said the bank's non-performing loans (NPL) ratio won't rise above 1.4 per cent this year. In Q3, DBS's NPL had jumped a hefty 44 per cent to 1.3 per cent.

So what's weighing on the banks' share prices? It could be their declining returns on equity which are now hovering around 10 per cent, and estimated to fall to single digit. Economic conditions deteriorate faster than expected, and regulatory and compliance costs are still ever rising.

Some also point to the banks' recent acquisitions.

DBS has just bought most of ANZ's consumer and wealth businesses in Asia and there is speculation that it may buy ABN Amro Bank's Asian private bank. Two years ago it had bought Societe Generale's Asian private bank. The purchase of ANZ has been cheap and if DBS does scoop up the Asian private bank of ABN Amro, it'd still be small potatoes.

OCBC is still in the process of integrating its April buy of Barclays's private bank business in Hong Kong and Singapore.

The banks point to their steadily rising wealth management income as the reason for picking up these assets.

Mr Gupta said during the media briefing on the ANZ acquisition that, with Asia growing at 6 per cent, Europe at one per cent and the US, 2 per cent, "you'd all give a left arm to be in Asia under the current economic conditions".

He's hit the nail on the head - in that Asia continues to grow at a blistering pace - and the three local banks are bang in the midst of all that rich demographics - a burgeoning middle class plus an expanding high income segment, and fastest ageing societies - all of which require financial services and investment products.

Even with Singapore growing at a sluggish one per cent, banks here continue to sell all manner of loans and financial products. Mortgages, credit cards and insurance products are not just staple offerings and despite them being commoditised, still offer pretty good margins.

The banks also have been expanding their reach into the surrounding ASEAN countries.

OCBC's boss Samuel Tsien said last month at the bank's Q3 results briefing that Indonesia is one of the three drivers for the group. The net profit of Bank OCBC NISP rose 37 per cent from a year ago, and contributed 8 per cent to the group's income, up from 6 per cent a year ago.

Indonesia's economic growth of 5-6 per cent is the highest in the ASEAN markets in which OCBC operates, said Mr Tsien.

Indonesia is welcoming investors, and NISP has a network of more than 330 branches, which stand ready to serve foreign investors who are less familiar with Indonesian domestic banks, he said.

"A few thousand Chinese companies want to invest, especially in the resource sector," he said.

UOB, which has the biggest Asian network of the three, said overseas profits before tax in Q3 and Q2 have risen above 40 per cent; they were at 38.9 per cent and 38.7 per cent in 2015 and 2014 respectively.

In a way, the three Singapore banks are actually growth stocks given their markets are in a region which is buzzing.

In addition they are protected in their biggest home market, which they also dominate via their pricing power.

The eagle-eye regulator - the Monetary Authority of Singapore - which keeps the local banks on their toes, is actually one of their biggest assets, giving comfort to customers and shareholders alike.

Sure Singapore has several foreign banks; the likes of Citi, HSBC, Maybank and StanChart compete for the same customers, but they face network and deposit gathering constraints.

Many foreign banks also have seen their reputations tarnished by scandals galore, and dented by the 2008 financial crisis.

So are the local banks underloved or just reflecting fair value?

This article was first published on November 9, 2016.
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