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DBS, OCBC & UOB: Even higher dividends probable?

Tuesday, May 23, 2023

For readers who who are not subscribed to my YouTube channel or who simply prefer reading blogs to watching videos, this is the transcript of another recent video I produced.

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One of the things I keep reminding myself about is to invest in businesses with strong balance sheets.

This is especially important in an environment where cash is no longer trash.

Debt has a real cost and is much costlier today.

As an investor for income, investing in businesses which have excess capital, we could also get a pleasant surprise from time to time.

This is because we could see higher dividends from these businesses in the form of special dividends.

I made this point in my recent videos and blogs on ComfortDelGro, for example.

Now, could we expect the same from DBS, OCBC and UOB?

I hinted at the possibility in recent videos and blogs.

Today, I will share some pertinent numbers from an analysis by Philips Securities to explore this possibility.



We know that rapidly rising interest rates within the last year provided a strong tailwind to Singapore's banks.

Net interest margins rose significantly and with that, net interest income jumped.

On the back of such strong performance, all three Singapore banks increased their dividend payouts to their shareholders.

So, from that, we can establish the fact that the banks are able and willing to reward shareholders.

However, with the Fed likely to pause its rate hikes, all three banks are providing guidance for lower net interest margins for the rest of the year.

In several blogs and videos which I produced, I said that Net Interest Margins for DBS, OCBC and UOB likely peaked in Q1 2023.

DBS thinks its net interest margin could be at 2.05% to 2.1%.

Both OCBC and UOB think their net interest margins could be at 2.1% to 2.2%.



Overall loans to Singapore residents fell by almost 4% year on year while business loans fell almost 6% year on year.

Total deposits grew by almost 6% to almost $1.8 billion.

Of this, the current account and savings account proportion declined almost 19%.

This is as customers continued to shift money into higher interest-bearing fixed deposits.

With loan growth declining while funding costs have caught up, it is hard to see any significant growth in net interest income.

With the numbers provided, it should be very clear that net interest income could come under pressure.

Still, if we should stay in a holding pattern, the current level of dividend payouts by the banks should remain undemanding.

This is because the banks will still benefit from the expanded net interest margin on a full-year basis.



A bright spot could be in fee income for the rest of the year.

DBS saw 29% quarter on quarter growth in fee income.

OCBC saw 14% quarter on quarter growth, its first in 6 quarters.

UOB also saw 14% quarter on quarter growth, its first in 4 quarters.

If fee income continues to grow, it could make up for some of the loss of growth in net interest income.

However, unless this segment should see some stunning growth, it is unlikely to result in much higher earnings to justify an increase in dividends.

Still, even if the banks should maintain their current dividend payouts, they would still make for very attractive investments for income.

With dividend yields of 5% to 6% at a payout ratio of around 50%, Singapore banks provide investors with peace of mind.

Then, what about the possibility of a higher dividend I suggested before?

Where is that coming from?



Well, all three banks have excess capital ratios or the Common Equity Tier 1 capital ratio.

As they only pay out half of their earnings to shareholders, their retained earnings would grow.

They could choose to pay out special dividends if they are not able to put the funds to work.

I made use of some numbers provided by Philips Securities, but the analysis is my own.

So, take this analysis with a pinch of salt since AK is no expert.

If AK can talk to himself, so can you!


23 comments:

AK71 said...

Conversation with a viewer on YouTube:

benedict chen
18 hours ago
Hi AK , I personally am expecting div to come down when fed cuts rates in the coming 2 years . So I personally will buy more at a lower price target .

AK
15 hours ago
Hi benedict.
If the Fed cuts rates, then, the banks' earnings will likely be impacted negatively.
This is also because if the Fed is cutting rates, it probably means there is an economic recession.
Banks are cyclical businesses and won't do as well in a recession. Crossing fingers. 😷

benedict chen
13 hours ago
thanks AK for the reply. Cross fingers . Waiting for a chance to throw the kitchen sink .

AK
4 seconds ago
LOL. I am a retiree. I cook and eat at home mostly. Still need my kitchen sink. πŸ˜…

Eddy said...

Hi AK,
Good afternoon. Perhaps this article could provide some optimism for long-term value & income (banking stocks) shareholders and investors. Afterall, the banking and financial sectors are the lifeblood of SG economy. “) πŸ€žπŸΌπŸ€

《 To achieve its goals, the Singapore lender is seeking faster growth in capital-light, high return businesses like wealth management, global transaction services and treasury market sales. Led by CEO Piyush Gupta, DBS also sees room for higher distributions to shareholders through dividends or share buybacks. 》
https://www.theedgesingapore.com/news/banking-finance/dbs-sees-annual-profit-exceed-10-billion-medium-term

AK71 said...

Hi Eddy,

Thanks for sharing the article. :D

I am staying invested in all three Singapore banks, for sure.

However, I remind myself not to be overly optimistic.

I don't know what I don't know.

Even if things go swimmingly well, Mr. Market has always had mood swings.

So, keeping some powder dry is probably not a bad idea. :)

Eddy said...

Hi AK,
Absolutely. Cheers! “) 🍻

garudadri said...

Dear AK
Thanks for this post. The banks are slightly higher hoping for an extended NIM honeymoon period, after the Fed officials once again started talking about need for higher rates in the last few days. They are no doubt attractive at this level
Of the three, talking of CET, OCBC has the highest. I am worried that they might end up buying a Chinese or Indonesian bank rather than reward us with buybacks and higher dividends
IMHO this is the point to be aware of although nothing much can be done by us. DBS, after the recent fiasco plus India expansion, has lower CET and hopefully all they need is to work more on wealth management. Their acquisitions of other banks wealth management arms should pay off if markets go higher and this will help us all as the management might pay higher dividends
UOB - All hinges on their execution of the CITI deal. UOB might outperform if this goes well and the ASEAN economies recover
The three banks are my biggest holdings together and I have strived to hold almost equal proportion of these three so far
Once the fed pivots and the rates burden goes, still if the economy holds up, these banks will continue to do well
Regards
Garudadri

zhenling said...

hmm I don't expect the bank dividends to fall over the next year, and if they do, likely not by much. Intend to hold my positions in banks even if prices/dividends fall. For the goal of long term income, some occasional drops are par for the course, and I'm prepared for that.

AK71 said...

Hi Eddy,

Huat ah! :D

AK71 said...

Hi Garudadri,

Since I shared my strategy to reallocate in an environment of high inflation and rapidly rising interest rate, my already significant investments in the banks have become even bigger.

So, like you, they are collectively my largest investment in my portfolio.

An extended expanding NIM honeymoon is not a bad thing although it could cause some pain for the REITs in the portfolio.

We can only hope that OCBC stays prudent and not overpay for any acquisition.

As for DBS, I don't understand why they had so many disruptions to their internet banking services when its smaller peers didn't. I can only hope it does not happen again. The disruptions aren't something crippling but they are high profile negatives.

For sure, the projection by Piyush Gupta for DBS to grow its earnings to $10 billion in the medium term is reassuring. This is a rather short time frame of only 3 to 5 years.

Analysts are only projecting a growth to some $9.6 billion. At a 50% payout ratio, it would already translate to a dividend per share of $1.86 which is higher than the current guidance of $1.68 per share provided by DBS. It would be sweet if DBS exceeds already positive expectations.

During "Evening with AK and friends 2023", I said UOB could lead the Singapore banks this year in terms of earnings growth as it has completed the integration of Citibank's consumer business it bought in 3 out of 4 South East Asian countries. They will contribute to UOB's full year earnings this year.

There are still many WILD cards out there but the possibility of a US recession doesn't seem to be one anymore because everything points to it happening within the year. This recession in the USA has become the most anticipated recession ever. So, when it happens, Mr. Market might not even bat an eyelid.

I have said many times that Singapore's banks are well capitalized and well managed. Recently, I also said that they are well regulated. If Mr. Market should go into a depression which has happened many times in the past before, I hope I would have the resources to buy more.

So, while I am staying invested in Singapore's banks, I am also refilling my war chest. :)

AK71 said...

Hi zhenling,

I share your sentiments.

Price is what we pay and value is what we get.

If we get a heart attack when we see stock prices plunge, we are probably more focused on prices than values.

As investors for income, our strategy is about being invested in bona fide income producing assets. :)

S A said...

What prices will u enter into DBS and OCBC given the price weakness now?

AK71 said...

Hi S A,

Time for some advertising. ;p

I shared my thoughts in this video I produced:
Which bank would I prioritize? At what prices to buy more?

keng said...

Hard to wait for the banks when REITs like AU8U kept enticing me with lower and lower prices. How like that? TT

AK71 said...

Hi keng,

I had to look up "AU8U". ;p

Can never remember stuff like that.

I have been holding on to my position in Capitaland China Trust and not done any buying or selling.

Winnie just now asked if it was trading at a fair price?

I am not sure as I am more wary of policy risks in China than anything else right now.

See comments section in this blog:
DBS fair value?

I rather put more money into investments I have less to worry about.

AK timid. ;p

Cory said...

Hi AK, hijack this thread. Do you plan to subscribe to Aims Apac PO ? I know you have a large exposure already in this Reit.

Cory

yuhui said...

hi ak,
i didn't find anything when i googled but just to be sure, you've never talked to yourself about keppel infrastructure trust before hor?

AK71 said...

Hi Cory,

I am releasing a video at 5.45pm today on this matter.

You might want to watch the Premiere.

I will also publish the transcript here later on. :)

AK71 said...

Hi yuhui,

They had a different name donkey years ago.

Used to blog about it frequently.

So disappointed that I got rid of it. -.-"

You might want to read this:
Keppel and CitySpring Trusts: Unequal marriage.

yuhui said...

oooh, thanks v much for the link. will look it up!

looking fwd to the video. the woman's voice nicer than the man's lol

AK71 said...

Hi yuhui,

Alamak. Really?

I have been told that the male voice is better.

However, to be fair to the lady, I still give her some work from time to time. ;p

Cory said...

HI AK, iReit has right issue too. Will you be talking in comparison as well ? Eagerly awaits talking to yourself !

AK71 said...

Hi Cory,

I have scheduled the Premier of the video I have produced on IREIT Global's rights issue.

It will be right after the video I have produced on CCT and AA REIT.

So, two videos today.

One at 5.45pm and another at 6pm.

You might want to watch the Premiere.

I will also publish the transcript here later on. :)

Too busy doing these things today.

No time for my games. Sadness. (TmT)

Winnie said...

i no longer go to the movies these day but these are Premiere i will happily camp for ;p
thanks AK, im sorry you didnt have time for games today haha.

AK71 said...

Hi Winnie,

You laughing even as you said you were sorry. (TmT)

Bad Winnie! Bad Winnie! ;p

I did manage to finish the latest event in Genshin Impact just now.

Got all the rewards.

Feeling better now. :)

See you later at the Premiere! :D


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