3Q Updates — SG Banks
Given that I have reviewed the 3 local banks in my previous posts based on their last full financial year results, I think it is now timely to review the performance of these banks again for two reasons. Firstly, they have just released their 3Q results a few weeks back. Secondly, 2020 is a year of many shocks and banking will definitely be affected. I want to know how the banks are doing thus far, how much of an impact the pandemic has on their businesses and whether one should still overweight these banks.
Let’s begin with a comparison of key performance and risk metrics across the 3 banks.
The results seem to be mixed, but steady, which is good in a stormy year as 2020. OCBC has the highest quarterly growth in terms of net profit at 41%, with DBS registering 4% growth and UOB registering a contraction of 5%. On absolute terms, DBS still register the highest net profit at 1.3 billion, which is not surprising given its bigger size than the other two banks. Both DBS and OCBC experienced a contraction in net interest income in the third quarter while UOB eked out a 1% growth. All banks registered teens-level growth in fee income.
It is rather obvious that the banks’ core lending business has taken a hit due to the pandemic and with interest rate being depressed. Looking ahead, I have a rather optimistic outlook despite the obvious headwinds. The very encouraging news of vaccines and its high efficacy indicate that we can potentially have the pandemic under control by mid next-year. Economic activity is bound to pick up, which will bring loan growth higher. Businesses will want to take the opportunity to take out loans or refinance the debt while interest rates remain depressed. Granted, loan moratoriums and fiscal support might taper off, exposing the banks to some non-performing assets but the signal from the banks in reducing allowance (or slight increase in allowance in the case of UOB) indicate that they do not feel that this is too big of a risk. Their NPL, LCR, NSFR rations have remained steady through the worse of the pandemic.
Furthermore, the significant growth in fee income growth indicate the robustness of the banks’ earnings beyond reliance on lending businesses. The banks derive substantial income from fee-income businesses such as asset & wealth management that serve as a bulwark against the more cyclical lending business.
Looking beyond the pandemic, the exposure these banks have to cyclical sectors such as construction and housing loans will provide further tailwinds as activity in these sectors pick up. Also, these banks have significant exposure to Chinese market which looks to be the first to rebound after the pandemic. Beyond China, Southeast-Asian markets like Malaysia and Indonesia where OCBC and UOB derive significant income from will be desperate to reopen borders and resume many stalled projects, providing further tailwinds.
Beyond the fundamentals of the business, the stock price of the 3 banks still remain attractive as an entry point. Below is a summary of the key statistics. All the banks are trading close to their book value with DBS slightly above book value. Their PE ratios are also not too elevated yet. Most importantly, their forward dividend yield is at least 4%, with DBS going as high as 5%. Given that MAS has capped the banks’ dividends for this financial year and maybe even the next, the dividend yield look especially attractive especially in a zero interest rate environment (with some markets going negative).
All in all, the banking stocks look a good overweight for now.
