The recent performance of Singapore's major banks has been impressive, with their shares hitting all-time highs. As at time of writing, DBS Group (SGX: D05) and Oversea-Chinese Banking Corporation (OCBC) both achieved record share prices, with DBS surpassing S$38 per share and OCBC reaching S$15.28. United Overseas Bank (UOB) also performed strongly, hitting an all-time high of S$32.64 during the same period.
The surge in share prices has been attributed to several factors, including high interest rates that boost net interest income, positive earnings reports, and investor optimism ahead of upcoming financial results. he overall performance of these banks has significantly contributed to the Straits Times Index (STI), which itself reached a one-year high, reflecting the banks' substantial market presence.
However, the question remains: will this upward trend continue? Several factors need to be considered, including dividend yield, payout ratio, and the potential impact of interest rate cuts.
Current Performance and Dividend Yield
Currently the dividend yields for Singapore's banks are notably attractive, ranging from approximately 5 to 6 %. Even at $38, DBS has a trailing dividend yield of 5.29%. After its run-up to $15.28, OCBC's dividend yield is at 5.63%. UOB at above $32 still can yield 5.3%. These yields are appealing to income-focused investors, especially in an increasingly probable lower interest-rate environment. Institutional investors and fund managers are also inclined to shift their funds from low-risk government-backed bonds, treasury bills and fixed income bonds to high yield yet fundamentally safe stocks of Singapore banks.
The banks have consistently increased their dividends, with payout ratios hovering between 50-55% of their earnings. This stability in dividend payments is a key factor that supports investor confidence and can help sustain share prices even if growth slows down.
Personally, I believe that as the yields of safe financial instruments such as Singapore Savings Bonds, T-Bills and fixed deposits continue to fall in the coming months, more funds will be shifted into Singapore local bank shares, further compressing their yields to closer to 4%. Hence, they may still be headroom for the bank shares to continue rising. At 4% yield, DBS will be priced at $54, OCBC at $22 and UOB at $44.
Payout ratios and Financial Health
As of recent reports, the payout ratios for Singapore's banks are generally between 50% and 55%. This range indicates a balanced approach to dividend distribution, allowing banks to reward shareholders while still retaining enough earnings to support future growth initiatives.
- DBS Group: Historically, DBS has shown a strong commitment to dividends, with a payout ratio around 51% for its recent interim dividend. The bank has also demonstrated significant growth in its dividend payouts, with a compound annual growth rate (CAGR) of 9.3% over the past five years.
- OCBC: OCBC has maintained a target payout ratio of approximately 50%. This disciplined approach allows OCBC to manage its capital effectively while providing consistent returns to shareholders. The bank's dividend payout has also seen a CAGR of 9.1% in recent years, showcasing its commitment to rewarding investors.
- United Overseas Bank (UOB): UOB's payout ratio is similar, hovering around 55%. This reflects its strategy of balancing shareholder returns with the need for capital to support its growth initiatives, particularly in expanding its regional footprint.
The banks' consistent payout ratios signal financial stability, which is crucial for investor confidence, especially in uncertain economic conditions.
While high payout ratios such as REITs are appealing, they must be balanced with the need for capital to fund expansion and innovation. The Singapore banks have shown a strong ability to grow their earnings, which supports their dividend policies.
The recent high-interest rate environment has positively impacted the banks' profitability, allowing them to maintain and even increase dividends. However, potential interest rate cuts in the future could affect their net interest margins and, consequently, their ability to sustain high payout ratios.
As the payout ratios of these local banks are rather conservative and sustainable, it should not be difficult for them to continue paying the same or even more dividends in a lower interest rate environment.
Interest Rate Cuts and their Impact
The outlook for interest rates is a pivotal factor influencing bank profitability. Following a period of high interest rates, there are expectations for potential cuts later in 2024. While high interest rates have bolstered net interest income—essentially the difference between what banks earn on loans and what they pay on deposits—any cuts could compress these margins. Analysts suggest that while the banks have benefited from elevated rates, the net interest margins (NIM) may have peaked.
The anticipated cuts could lead to a decrease in profitability, particularly if banks are unable to adjust their lending rates downward in tandem with deposit rates. However, the banks are also diversifying their revenue streams. For instance, non-interest income, particularly from fees related to wealth management and credit card transactions, is expected to grow, which could help offset any declines in net interest income.
Technical Analysis
DBS
DBS share price will face an immediate resistance at $38.38. Should it break through this resistance with volume, it may propel towards $40. Otherwise, it may consolidate above the $36 range above its 100, 50 and 20 days moving averages. There is strong immediate support at $35.55, which if breached will see it tank towards the $33 range, which is an attractive point where long-term investors could start nibbling shares of DBS.
OCBC
OCBC share price will face an immediate resistance at $15.33. Should it break through this resistance with volume, it may propel towards $16.50. Otherwise, it may consolidate above the $14.50 range above its 100, 50 and 20 days moving averages. There is strong immediate support at $14.25, which if breached will see it tank towards the $13.80 range, which is an attractive point where long-term investors could start nibbling shares of OCBC.
UOB
UOB share price will face an immediate resistance at $33.10. Should it break through this resistance with volume, it may propel towards $35. Otherwise, it may consolidate above the $31.20 range above its 100, 50 and 20 days moving averages. There is strong immediate support at $30.50, which if breached will see it tank towards the $29 range, which is an attractive point where long-term investors could start nibbling shares of UOB.
I am on the lookout for any correction or retracement of the bank share prices and may consider to start nibbling more shares of DBS at around $35, OCBC at around $13.80 and UOB at around $30.
Thank you for reading!
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