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During the pandemic induced bear market, as the dust was settling, within a few weeks, I made a relatively large investment in UOB.
The plan was to get my investments in DBS, OCBC and UOB to be on equal footing with each other.
Mr. Market's severe bout of depression provided the perfect opportunity to execute the plan.
See:
and
Quite simply, the plan was about diversification.
That decision turned out very nicely as UOB went on to buy Citibank's assets in a few Asian countries.
That move is expected to give a boost to UOB's future earnings and could lead to a more favorable view of the local lender.
More importantly, it could also mean higher dividends in future.
This week, I decided to have a stronger focus on value and increased my investment in OCBC.
The size of this increase is around 10%.
Doesn't sound like a lot but given the size of my investment in OCBC, it is pretty sizeable to me in dollar terms.
OCBC offers better value for money when compared to DBS and UOB, in my opinion.
Amongst the local lenders, OCBC is trading at the smallest premium to book value.
OCBC also offers the highest dividend yield and this is made more attractive by the fact that it isn't the one with the highest payout ratio either.
With the recent purchase, OCBC has become my largest investment in the banking sector.
OCBC should continue to bring home the bacon and with a larger investment, I am looking forward to larger servings in the future.
If Mr. Market should offer me lower prices, all else being equal, I would most probably be adding to my investment in OCBC again.
I don't know exactly why OCBC's valuation is cheaper than DBS or UOBs'.
However, if I were to hazard a guess, I would say it is probably because of OCBC's exposure to China.
People are generally very wary of China and investments in China in general.
It has been going on for a while now.
Alibaba, anyone?
China accounts for about 25% of OCBC's loans.
See:
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| Source: OCBC |
Alamak!
How like that?
Has Mr. Market priced in a Chinese risk premium?
If we believe that China is going the way of the Dodo, then, maybe, we should avoid investing in OCBC for now.
If we believe that the negativity towards China and, to a smaller degree, OCBC is overdone, then, we want to stay invested.
Having said this, objectively, I will continue to look out for opportunities to increase my investments in all three local banks as I believe they will continue to shine.
In fact, with interest rate rising, unless we see a deep and long lasting recession, all three local lenders should shine even brighter.
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Reallocate as interest rate rises.
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26 comments:
I like OCBC but UOB is giving me more return, so I will add UOB this round hahaha
Hi Daniel,
All three banks are good investments.
Can't go wrong with any of them. :)
Dear AK
Nice to see this
In fact, I added OCBC this week after adding earlier twice this year- no regrets despite a slight fall, which is in line with the wider market. I will be buying DBS and UOB if they fall, in fact I missed out on DBS Friday as it went higher
The market conservatively values OCBC vis a vis DBS abs to a certain extent UOB
The reasons, as I deducted are:
1- Traditionally OCBC is seen as an “old fashioned lender”. Under the previous CEO as well as earlier, not only was the payout ratio lower as regards dividends, but their overall NIM struggled
2- Greater China exposure, the not so recent but prudent Wing Hang acquisition and more importantly the “intention” to expand in the Greater China market. This is not seen favorably by many investors, especially younger ones!
Overall, with recent events and the China dampening effect, this will be the case
3- The 2022 CYQ1 results were slightly sub-par. The GE insurance stake is a double-edged sword in my opinion and with the market downturn, this will affect their valuation as the GE holdings will be “marked down to market”. The growth scare will make this worse with VONB a potential casualty
4- Last but not the least, the market does not like the fact that the OCBC CET1 ratios are very high! Though this is testament to the bank’s strength, this can also be construed that cash is not being “effectively” deployed or used. The potential prospect of a big acquisition and its subsequent integration problems under the new CEO, especially in Greater China, plus the lack of a clear plan to increase buybacks and/or use the cash to boost dividends, is weighing on investor minds
On the bright side, perusal of institutional investor data on SGX reveals that the biggest buys were OCBC and a couple of REITS over the first two weeks of May. In this regard, optimistic investors regard OCBC as a “undervalued dividend plus value play” as you alluded to in your post. I fully endorse your views and will be adding more if the market offers me a chance
Warm regards
GARUDADRI
OCBC trade at smaller premium because of their holding in Great Eastern, unlike DBS and UOB which is pure bank play. Remember Holdco always trade at discount.
Hi garudadri,
Thank you for the very detailed sharing! :D
I actually like that OCBC owns most of Great Eastern Life as the business of selling insurance is a really good business and Great Eastern Life is a strong company but like you said, it is a double edged sword.
Hope to pick up more at lower prices. :)
Hi Sentosa Gani,
Yeap, I guess that is a possible reason for OCBC's cheaper valuation.
Not complaining as I am more interested in the dividends than trading the common stock. ;p
Been adding wilmar
Hi SgFire,
I think Wilmar is very much undervalued.
Watching that support at $4 like a hawk ;)
Below 4$ ? It tried to break before but failed. I go in first. Lol
Hi SgFire,
I would like to add if the support at $4 is tested again.
I hope the support at $4 holds.
If it breaks, we could see $3 again. -.-"
Hi AK,
For OCBC's latest div exercise I was hoping for scrip div option but didn't have haha.. friend say OCBC too much cash maybe that's why haha... but i would take shares over cash for OCBC now perhaps i should effect this option permanently.
Hi garyp,
The only time I accepted scrip dividend from OCBC was during the pandemic.
$7+ per share.
Too cheap to say "no." ;p
As a retiree who makes a living by investing for income, I would usually take cash dividend instead of scrip.
Yes, I agree with your friend on the point that OCBC has too much cash now. ;)
OCBC bought back 300,000 shares in the market at S$11.72 each for a total consideration of around S$3.518 million on 20 May 2022.
Source:
https://links.sgx.com/1.0.0/corporate-announcements/SDT2KK5LX103MCT9/6c33360a81d139520ae06de4da23a8212d05b657bd0f09b19b8f5ca968d6b326
Hi EX,
Wondering what is a good price to buy is like wondering when it is a good time to buy which means timing the market.
AK gets anxiety when people ask him questions like that. -.-"
I can only say that I am comfortable with adding to my investment in OCBC now.
However, if prices for all 3 banks were to decline by another 10% which would mean testing their respective trendline supports, I would buy more.
That's just technical analysis, of course.
Remember, AK is mental and DCA might be a better way. ;p
Hi AK
Would you consider buying China banks e.g. Bank of China, CCB, ICBC listed in HK?
Cheers
Mei
Hi Mei,
I know our local banks a lot better than the Chinese banks.
So, I will stick to investing in our local banks.
Also, I am too lazy to buy anything that is not listed in Singapore. ;p
Hi EX,
If we are investing for income which is what I do mostly, Singapore has plenty to keep us busy.
If we want to invest for growth, Singapore has pretty good options too.
I have made pretty good capital gains over the years and I have blogged about some of these gains.
However, if we are looking for greater volatility to get bigger capital gains, then, the stock markets in the USA or HK might be better destinations.
The only time I wandered out of Singapore, I was clobbered by CLOB and that was donkey years ago. (TmT)
Once bitten, twice shy.
Of course, we are all wired differently, don't let me influence your decision.
As for gold, I buy gold bullion (i.e. physical gold) from UOB.
Hi EX,
Just talking to myself, as usual. ;)
Hi AK,
Just like to share…
I’ve invested into OCBC in 2005 at $5+ per share, with a meaningful quantity. There-after the bank issued bonus share to reward shareholders and also did a stock-split of 1 to 2 shares after the shares price surpassed $10 per share. Still happily holding onto OCBC shares till now while receiving (steadily increased) annual dividends. Definitely an income generating and retirement’s stock for me as OCBC shares has already grown by multiple times since 2005. “)
Last week, I’ve bought and accumulated more OCBC shares at an average price of $11.60.
OCBC looks cheap currently among the three SG Banks, trading at a book value of 1.0x and a PE of less than 10x multiples.
With their last dividend payout of $0.28 per share for 2H2021, this works out to be at least $0.56 per share p.a. for FY2022.
This gives a yield of 4.8% p.a. at current share price $11.70 with a dividend payout ratio of 0.46x. IMO, this is a rather conservative payout ratio based on their last eps of $1.21 annualized.
I believe OCBC has the potential to further increase the annual dividend payout to at least $0.60 per share, yielding 5.1% (@0.5x payout ratio) if they wishes to.
Fingers crossed! 🤞🏼🍀 “)
Hi Eddy,
Thank you for sharing your journey with OCBC! :D
I like stories like this because it encourages people to invest in bona fide income producing assets for a more secure financial future.
It reminds me of my investment in ST Engineering at $1.55 a share donkey years ago shortly after I entered the workforce.
I wish I had bought some OCBC shares back then. ;p
Hi EX,
I bought 1oz gold bullion coins and keep them at home.
In case we have to escape in a hurry, we want to have these close at hand. ;p
Hi AK,
have you continued to add OCBC shares to your portfolio to take advantage of the market softening since the stock claimed top position among the banking trio in your holdings, or have you turned your attention to equalizing your bank holdings by accumulating the other 2 suspects that appear to be more heavily oversold and are now staging more delightful comebacks tracking positive momentum in the US market? Thanks for your sharing!
Hi Kent,
In my last two blogs, you might remember that I said I have been too active as an investor for income in 2Q 2022 and that I was looking forward to becoming lazy again.
Well, I have been lazy since my last blog. :D
It is easy to be lazy as an investor for income and it is easy to be honest about it. ;)
Of course, I also said that because I am cheap, I might become active again if Mr. Market decides to have a cheap sale but I haven't seen one.
So, more OCBC or balance things up with more DBS and UOB?
If there is a cheap sale, I am more inclined to get more DBS and UOB to balance things up.
Up or down, whichever way the stock market goes, I guess I would be delighted either way. :)
Happiness! :D
Dear AK71
Given the new digital banking licences given out in Singapore are you concerned that the return on assets of our banks could go the way of Bank of China (Hong Kong) ? As more people eating the same pie, less share of the profit pie for each entity. Or do you believe that somehow our local banks can maintain their margins like the Big 4 Australia banks ?
Like to hear your thoughts.
Hi Mr M,
I have been asked the same question before but I cannot find my replies in the comments now.
Anyway, I don't have a crystal ball and cannot look into the future but I do know that Singapore banks are well capitalized, well run and very entrenched.
So, digital banks might chip away at their market share but it will take a mammoth effort to really hurt DBS, OCBC and UOB which have also gone digital and, more importantly, international.
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