DBS, OCBC and UOB: Another tailwind from China?

For people who do not follow me on YouTube or prefer reading my blogs, this blog is an expansion on the transcript of another recent YouTube video which I produced.

I try to keep all my YouTube videos short with the sweet spot at around 3 minutes per video.

Sometimes, a video runs 4 or 5 minutes because there are more things to share but any video I produce should never be longer than 5 minutes in length.

This blog expands on what I shared in a recent video on money flowing into Singapore and what it means for our local lenders.

Regular readers of my blog know that DBS, OCBC and UOB are three of the largest investments in my portfolio. 

Our local lenders are well capitalized and well managed. 

They are also very attractive to investors for income as they pay meaningful dividends. 

With many major economies around the world most likely heading for a recession, the Monetary Authority of Singapore decided to err on the side of caution recently and not tighten policy even as inflation remains elevated.

Singapore's economy has been slowing down and the Monetary Authority of Singapore sees a higher risk of further downside in the coming months. 

We could see Mr. Market turning pessimistic if the authority's fear comes true. 

In such an instance, DBS, OCBC and UOB could see the prices of their common stock trading lower. 

When the bear emerges from its cave, none is spared as fear ripples through the market.

Indeed, there is a good case to be made as, fundamentally, the local lenders' net interest margins could be squeezed as their higher funding costs catch up. 

So, although we might talk about Mr. Market being pessimistic, it might not all be sentiment driven.

Higher funding costs would affect the banks' net interest income negatively, all else being equal. 

However, we could see an increase in non-interest income which might compensate for the weakness in interest income. 

How so?

With the demise of Credit Suisse, Switzerland’s reputation as a safe place to bank and invest has been affected negatively. 

In contrast, Singapore’s reputation for political stability, transparent government policies and robust business environment is very much intact. 

There is much optimism amongst industry insiders as wealth managers and private bankers expect growth in 2023. 

A growing number of wealthy Chinese people are coming to Singapore, now called the “Switzerland of Asia” in order to escape possible crackdown in China. 

Understandably, this has created some unease amongst Singaporeans who increasingly think that mainland Chinese buyers are driving up the costs of housing and private cars in Singapore. 

In fact, there were claims that the Monetary Authority of Singapore had asked banks here to avoid discussing the source of wealth inflows presumably to put a lid on fanning the negative sentiments on the ground. 

The Financial Times said that it was obvious that the Monetary Authority of Singapore was referring to China with all the news in recent months about family offices setting up here and mainlanders moving over. 

In response, the Private Banking Industry Group said in a statement on 14 April that the Monetary Authority of Singapore "has not issued a directive, tacit or otherwise, for banks to keep quiet about the origins of wealth inflows." 

The group went on to say that while public commentary tended to focus on fund flows from China into Singapore, the sources of overall inflows into Singapore in fact remain diversified. 

The increased fund flows into Singapore were from high net-worth individuals from different markets. 

Therefore, the fact remains that there is a lot of money flowing into Singapore.

How like that?

Well, this is good news for the local banking sector even as it creates a sense of unease amongst the locals. 

As investors, we want to recognize this as another possible tailwind for the local banking sector. 

Staying invested in DBS, OCBC and UOB is probably a good idea even as they are faced with higher funding costs and the prospect of narrowing net interest margins.

What about the global economic slowdown which the Monetary Authority of Singapore is worried about?

Yes, Singapore's economy is slowing down but don't be too pessimistic. 

Of course, don't be overly optimistic either. 

Don't throw in everything including the kitchen sink as dark clouds for the global economy are not dispersing. 

Be pragmatic. 

Keep some powder dry and have a war chest ready. 

If AK can do it, so can you!

Related post:
Recession could hit Singapore!