Are Singapore Bank Stocks Still Cheap?

Singapore banks namely DBS, OCBC and UOB have recovered strongly in stock prices over the last few months. This has pulled up the STI index.

Are they still cheap? Or are they expensive after this rally?

Why bank share prices fell reason #1: COVID-19 created some financial impact

COVID 19 has caused much disruptions to the economy. With lock-down measures in place, businesses have to cease operations and many individuals were laid-off. 

The ramifications of the pandemic were primarily liquidity issues. Businesses and individuals experienced loss in income and are unable to repay loans. This caused much stress to the banking sector as it may experience high default rate. The MAS has came up with support measures such as loan moratorium. 

This will result in banks not receiving interest payment, which raised concerns. 

According to an article by the Straits Times, more than 18,000 firms have taken out loans amounting to over $14.5B under schemes overseen by Enterprise Singapore (ESG) as of Sept 30.

Most of the loans were taken up between March and June and over 5,400 companies had applied to defer principal payments on secured loans. 

But loan moratoriums are declining....

 This is due increasing cash flow in small and medium sized enterprises (SME) , with the resumption of business and support from various relief measures. 

DBS’s loans under moratorium have contracted significantly by 70%.

Loans under moratoriums have dwindled from 4.3% to 1.3% of total loans due to the expiry of moratorium (many borrowers did not seek extension).

In Singapore, loans under moratorium declined by 88% for residential mortgages and 76% for SME loans.

In Hong Kong, loans under moratorium for large corporates and SMEs declined 52%.

Delinquencies were low for borrowers exiting the moratorium in Singapore and Hong Kong.

UOB head of group personal financial services Jacquelyn Tan said: "While there was a spike in calls during the early days of the (debt relief programme), we have seen a drop of more than 50 per cent in new loan deferral applications in the past two months." 

Hence, banks can expect to see healthy balance sheet in next few quarters. 

Why bank share prices fell reason #2: Potential disruptions of digital banks

Traditional banking industry used to operate in a monopolistic/ oligopolistic environment. The entry of digital banks increase competition and pose a threat to incumbent firms. 

Why is this so? 

This is due to various factors such as :

1. Better user-oriented experience.

Before the advent of digital banks, consumers had very limited options when it came to choosing the ideal bank to meet their needs. (Monopolistic environment, only 3 Singapore banks)

This meant that banks do not have the incentives to improve their services since consumers will go to them regardless. This also meant that, banks are in a position of power and could cherry-pick their clients. 

As a result, for many people, especially new entrepreneurs. It is hard for them to obtain loans. 

The entry of digital banks will be assist the under-served markets in Singapore. Digital banks leverage on advancements of technology such as AI and big data. This allows digital banks to perform in-depth analysis and increase knowledge of their clients. 

With this knowledge, digital banks can better personalise their platform, optimising it to best-satisfy the needs of clients. Hence, it provides superior user experiences

2. Higher interest rates

Without the need to set up brick and mortar branches, it significantly reduces operation costs. This enables digital banks to pass on these cost savings onto the customers. Which could potential translate to higher interest rates on savings.

In addition, digital banks may offer lower fees for financial products, as there are no middleman involved. 

3. Convenience

With everything online, one need not travel down to a physical branch to open an account. One can send in an online application and the process is seamless and efficient.

User can access banking services 24/7 at their finger tips. Unlike traditional banks where there are opening hours and queues before you are attended.  

Why digital banks may not take over traditional banks

Since South Korea has issued full digital bank license in 2017, we will examine it as a case study. 

Despite the entry of digital bank, Kakao. Korea largest traditional bank, KB Financial Group performance was not adversely impacted

Net interest margin (NIM) measures the net interest income a bank generates from credit products such as loans, mortgages, etc. NIM is a profitability indicator that approximates the likelihood of a bank or investment firm thriving over the long haul.

From the diagram above, NIM has been increasing steadily.

This tells us that digital bank may be serving a different market and there is minimal overlap. It could also suggest the pie is growing and firms are able to earn profits. 

The fight for deposit is not new. The inauguration of Singlife, a digital insurer has been attracting deposits. It has extensively marketed it's products and raised the benchmark. 

Back in 2017, the Korean banks may not be prepared for digital banks which resulted in Kakao stellar performance. There was a second digital bank in Korea, K-bank. However, it has not done well with poor take up rates. On the surface it seems there is only room for one digital bank. 

The question is raised, how well will digital banks do in Singapore. Which company will emerge victorious and whether there is room for 2 full digital banks in Singapore.


It is our view that digital banks may not cause a major disruption. 

Operations for digital banks will only commence in 2022, traditional banks have time to "fence up" in anticipation of new competitors. In addition, the banks are highly innovative and constantly improving. Singapore market is relatively matured and our money/ investments are tied to reputable banks. 

Hence, the market share of traditional banks will not be easily eroded. 

Why banks can be cheap now reason #1: Recovering Net interest margins

Net Interest margins (NIM) is the spread that banks make from borrowing from you money and lending it out.

It is core to their profitability and this spread may have bottomed out already. (What does this mean?)

Banks can expect to see increase in net interest margins (NIM) with increasing interest rates. 

Interest rates has been increasing; up 11 basis point since January 2021. Analysts expect FY21 NIMs to be around 1.45-1.55% for the three banks. 

Why banks can be cheap now reason #2: Strong capital ratios

A DBS report states that as of end 4Q20, Singapore banks CET1 ratios of 13.9% to 15.2% were well above comfortable operating range of 13% (CET1 ratio compares a bank’s capital against its risk-weighted assets to determine its ability to withstand financial distress.)

Based on a report by Seedly, all 3 banks have strong balance sheets.

The Loan-to-Deposit Ratio, a metric for liquidity is between 80% to 90% 

Thus, higher dividend payout policies are viable post FY21 to distribute excess capital. 

Why banks can be cheap now reason #3: Removal of dividend cap

Due to pandemic, MAS has called on banks to cap their total dividends per share at 60% of FY19 levels for FY20, while offering the scrip dividend option.

This was to bolster banks' capital buffer, enabling them to absorb shocks and support lending to businesses and individuals through the crisis. 

One year into the pandemic, Singapore banks has seen "Budding Shoots of Growth", according to CGS-CIMB analysts. The 3 banks saw sustained loan growth momentum, an expansion of 3.7% year to date. Coupled with the wear off of loan moratorium. 

As a result, MAS is likely to ease it's stance on dividend cap imposed as Singapore banks have preserved sufficient capital, reported by DBS analyst Lim Rui Wen.

Investors can expect higher dividends for FY21. It is forecasted to possibly be a gradual two-stage relaxation on the cap. 

Management of banks have signalled their willingness and ability to commit to higher dividends in FY21, subjected to MAS guidelines.

What is the dividend yield if dividend caps are removed?

Indeed, we've seen a reduction in dividends paid in 2020. If  dividends cap were to be removed, we can expect it to return to 2019 levels. 

DBS - dividend yield could be around 5.24% at a share price $28.60

UOB- dividend yield could be around 4.8% at a share price of $26.00

OCBC- dividend yield could be around 4.1% at a share price of $11.80

Why banks can be cheap now reason #3: Current P/B r of DBS, OCBC and UOB

To evaluate whether bank stocks are expensive, we usually look at it's Price to Book Value (P/B)

Base on the chart below, DBS has a P/B Value of 1.34 (blue line).

UOB has a P/B value of 1.13 (blue line). It has the most exposure to ASEAN of the 3 banks.

Current P/B is below 50% percentile.

OCBC has a P/B value of 1.06 (blue line). It has Great Eastern which is in the insurance industry as a subsidiary.

From P/B matrix, OCBC is the cheapest.

Current P/B is below 50% percentile and by a large margin. 

Below is the P/B of the 3 banks over the last past 5 years. 

It is evident that DBS has the highest P/B and has recovered the strongest. It may be interpreted that DBS is perhaps the most expensive of the 3 banks based on this valuation matrix.


The safest conclusion perhaps is that the 3 banks are inexpensive currently. 

As to whether they are cheap now and are shares to buy really depends on how you interpret their subsequent recovery.

Alternatively, if unsure, diversify by choosing STI index. It gets you all 3 banks at one go as banks are 40% of the STI index.

 UOB and DBS will be releasing 1Q results in early May2021. Hopefully there will be good news.

For more analysis, check our YouTube tutorial below.


Last updated on May 3rd, 2021 at 08:57 am

Kasper Toh: Enthusiastic Research Associate and Writer at The Astute Parent!
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