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Singapore Banking Sector

Singapore Banking Sector – Continued Strength

Singapore | Financials

 

Investment summary

 

Banking stocks have performed well this year, up some 9% YTD at the high, as measured by the FTSE ST Financial Index (FSTFN). The outlook is definitely improving with several quarters of improvement as allowances declined, NPLs plateaued and margins started to reverse up. Quarterly profitability trends have also shown good improvements in recent quarters. We think that the recent price weakness, partly due to the lull period in May and June, is an opportune time to accumulate. Our top pick in the sector is DBS.

 

Favourable operating conditions

 

Banking stocks have performed well this year, up some 9% YTD at the high, as measured by the FTSE ST Financial Index (FSTFN). While share prices have come off and the index is now off the year’s high of 1112.15 in May 2018, we believe that most of the positive drivers are still intact despite current equity market softness. The outlook is definitely improving as the banking sector saw several quarters of improvement as allowances declined, NPLs plateaued and margins started to reverse up.

 

Healthy set of 1Q18 results

 

In general, quarterly profitability trends have also shown good improvements in the past few quarters. For DBS, 1Q18 was also a record quarter for the group. This was similarly the case for the other banks, stripping out exceptional items. In terms of pre-tax profits, the 3 banks reported combined total profits of S$4.4b, the highest level historically. Net Interest Margins (NIMs) moved up to a range of 1.67% to 1.84% in 1Q18. On average, this was the 5th quarter of improvement. Dividend payout trend has also been edging up in the last decade.

 

Time to accumulate

 

 

At this year’s high, DBS was up 23% YTD, OCBC was up 13% and UOB was up 13%, which brought the 3 stocks to all-time historical highs. Since then, together with market softness, the banking stocks have also fallen in tandem. We think that the recent price weakness, partly due to the lull period in May and June, could also be an opportune time to accumulate. Our top pick in the sector is DBS.