DBS, OCBC & UOB: Even higher dividends probable?

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!

Reference: 
More reasons to invest in SG banks.