The 3 local banks in Singapore have just released their results for the 1H2020 not long ago. Many investors are curious which bank should they invest in. In this article, I’ll be sharing some of the key comparisons between the 3 banks so that you can make a more well informed decision.
|Year on Year Difference||Revenue||Profit Before Allowances||Allowances Made||Net Profit|
|DBS||S$7.752 billion (+7%)||S$4.713 billion (+12%)||S$1.935 billion (+>100%)||S$2.412 billion (-26%)|
|UOB||S$4.667 billion (-6%)||S$2.581 billion (-8%)||S$0.682 billion (+>100%)||S$1.558 billion (-30%)|
|OCBC||S$5.115 billion (-3%)||S$3.227 billion (-4%)||S$1.407 billion (+>100%)||S$1.428 billion (-42%)|
Across the board, we can see that DBS performed the best, pulling in a increase in revenue as well as profit before allowances while the other 2 banks fell short from the year prior. We can also see that DBS made the highest allowance for bad debts of S$1.935 billion while UOB made the lowest allowance for bad debts amongst the 3 banks of S$0.682 billion. It is important that investors understand what are allowances and how it impacts a bank’s performance.
Essentially, in accounting terms, allowances are made for when there is a possibility of a bad debt that might not be recoverable. The company or bank in our case, will then prepare itself for such instances by setting aside an item called “allowance for impairment loss”. This will show up as an expense in the income statement even though the debt is not yet confirmed to be unrecoverable. When the debt is confirmed to be unrecoverable, you will then deduct the amount off the “allowance for impairment loss” as well as your “trade receivables”. In cases which the debt is paid in full, it will then be accounted in the income statement as an income.
Allowances are not fully realized expenses. They are for companies to better prepare themselves for possible losses in cases which debts are unrecoverable. If the debt is recoverable, the income statement will in turn, reflect that as an income accordingly in the next set of results. Investors have to understand that just because allowances are made and expenses are incurred, that does not mean that the company actually made losses.
Key Financial Ratios
|As at 30 June 2020||Net Interest Margin||Cost/Income Ratio||Non-Performing Loans Ratio||Liquidity Coverage Ratios (LCR)||Leverage Ratio||Common Equity Tier 1|
Across the board, we can see that DBS performed slightly better than the other 2 banks, with the highest NIM as well as the lowest Cost/Income Ratio. Just to recap, the Cost/Income ratio is used to see how well the company is managing its costs and spending to generate revenue. In essence, a low Cost/Income ratio signifies that the company is managing its costs well and is not overspending to generate revenue.
DBS does fall short in terms of having the lowest CET-1 and leverage ratio, whereas OCBC has the highest. Overall, all 3 banks are doing pretty well and are well capitalized.
|Annualized PE Ratio||PB Ratio||Dividend Yield|
Note : The dividend yield is calculated using 60% of FY2019’s dividend per share
Based on the closing price today, we can see that UOB is the most attractive bank to buy as compared to DBS and OCBC. Similarly, based on the 5 year average, we can see that UOB is also the most attractive bank to buy as compared to DBS and OCBC.
The dividend yield does not show the full picture for our 3 banks because the dividends are being capped by MAS. If they were to pay the same amount of dividends as FY2019, UOB and DBS will be yielding upwards of 6% while OCBC will be yielding 5.9%. Also, the PE ratio is on the higher side due to the amount of allowances made by the banks and not because the bank incurred lower revenue for 1H2020. Not to mention, OCBC’s earnings were pulled down slightly due to Great Eastern’s MTM losses.
Thoughts On Scrip
As per MAS’s announcement on 29th July, they called on our local banks to cap their total dividends per share for FY2020 at 60% of FY2019’s DPS as well as offer shareholders the option of receiving the dividends to be paid for FY2020 in scrip in lieu of cash. After this announcement, all 3 banks revised their dividends for the year as well as announced the scrip option for shareholders.
For DBS and UOB, the issue price will be based on the average closing price of the first and second ex-dividend date. For OCBC, they are throwing a 10% discount on top of the issue price while DBS and UOB did not mention anything about a discount.
For myself, I have positions in all 3 banks and I am looking to take up the scrip in full. Of course, if there is any leftover cash, I will opt for the partial cash and partial scrip option instead. The key reason why I’m taking up the scrip is simple. I get to reinvest my dividends without paying any forms of commission, and the best part is, it’s at a discounted price, at least for OCBC’s case. Seeing that I’m a long term investor, this allows me to use my dividends to compound and grow my portfolio at a faster pace.
In my view, I feel that all 3 banks performed pretty well or at least, in line with my expectations. I have since bought more bank stocks after the banks announced the scrip option for shareholders. I am very bullish on banks recovering as the economy recovers but of course, the low-interest rate environment will be a pull down on the 3 banks’ performance and hinder their growth potential. Investors who choose to invest in banks now, will need to understand the short-term pains that they need to go through before enjoying the long-term gains.
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