Seeking a turning point for bank stocks in Singapore
Singapore is a flourishing offshore financial center, thanks to a stable political environment, and well established legal and tax policies. The island country’s banks have an excellent reputation for servicing not only the domestic economy, but also the entire Asia pacific region. The best known local banks are DBS, OCBC and UOB.
Bank stocks have been performing badly for a year
Despite Singapore’s strong position in Asian banking, as well as its growing share of the global private wealth management sector, the performance of its leading banking stocks has been very lackluster over the last year.
Following the peak in April 2015, the prices of major banking stocks in Singapore fell by around 20% in the following 8 months to December 2015.
Why the fall in Singapore bank stocks?
Like most banks outside of the US, the precipitous decline in interest rates combined with ever increasing regulation, has made it difficult for the sector to enjoy the high profitability and margins that it did prior to the great financial crisis. Moreover, global economic growth is coming under pressure from major headwinds in China, just as the US, which has seen unemployment rates drop sharply, may now be peaking out. This puts a break on any expansion in the financial sector.
As a consequence, the Return on Equity (ROE) of Singapore’s banks has dropped well below historical peaks. Investors currently believe that Singapore banks will not be able to recover margins to peak levels.
While it is possible that ROE for Singapore’s banks may recover at some point, the timing is necessarily uncertain. In general, bank shares tend to perform best when investors begin to anticipate an upturn in economic growth, and of course this is difficult to predict. However, one potential turning point for Singapore’s bank shares might be if DBS falls to its book value. This occurred most recently in 2011, and proved a good entry point for buying.