Is Singapore’s banking blue chip stocks worth investing in for 2018?
If the performance by Singapore’s top three banks in the last year is anything to go by, then it would be right to say the worst is over. Robust economic growth and rising interest rates have helped DBS Group, OCBC, and UOB post better than expected financial results, and in turn strengthening investors’ confidence in the capital markets.
With the three stocks trading near all-time highs, expectations is high among investors and analysts that the stocks will continue to power high as rising wealth continues to boost net income. Accelerated economic growth and rising U.S interest rate should help support the three bank’s performance in 2018.
Rising rates should allow the banks to charge more on loans thus boosting their net interest income. Rising wealth is another factor that should help support and sustain a move by the banks to raise interest on loans.
DBS Group meteoric rise in the market, is one that continues to show no signs of slowing down. After a record-setting 2017, the stock continues to touch record highs with expectations high that the momentum will continue as Singapore moves to raise interest rates.
The stock has rallied by more than 70% over the past 12 months, as investors continue to take note of the company’s robust growth in multiple business engines. A significant increase in dividends in the recent quarter is a further testament to sustained momentum across various businesses that have resulted in more free cash flow.
DBS Group has strengthened its position and market share in Singapore’s banking industry, accounting for 30% of mortgages and 21% of credit card spending.
DBS’ Earnings Growth
DBS Group rose the most in almost 8-years after reporting a record-setting quarter on the earnings front. The region’s largest lender posted a Q4 profit that beat analysts’ estimates and promised higher dividends.
Net income for the three months ended December increased 33% to S$1.22 billion helped by an increase in income from loans and wealth management. Net interest income rose 15% as allowance for credit and other losses fell 51%. Wealth management increased 44% leading to an increase in fees and commissions
Higher Dividend for DBS in 2017
Buoyed by the stellar financial results, DBS Group Board of directors approved a S$1.2 annual dividend payout from 2018 onwards. The bank also proposed a final dividend of 60 cents a share for 2017.
According to the Chief Executive Officer (CEO), Piyush Gupta, DBS Group has returned to being a high yielding dividend stock.
The significant increase in dividends reflects the quality of our earnings, the strength of our balance sheet and the improved returns we are generating for shareholders,” he said.
DBS Group’s 2018 Outlook
Gupta remains confident about the company’s long-term prospects given that interest rates hikes at the back of a strong economy could lead to further growth in income. A cleanup of the loan book means the bank is no longer burdened by bad debts and can now focus on profit growth.
Gupta also emphasised the need to focus on digital transformation, which could help increase efficiency and lower costs as more customers embrace online banking.
Analysts, on the other hand, remain optimistic about DBS Group’s long-term prospects. Jefferies Group has upped its FY2018 EPS estimates up to $6.68 per share from a prior forecast of $6.49. Brokerage firm ValueEngine has also upgraded shares of the company to a ‘buy’ from a hold. Zack Investment Research also rates the stock as a ‘buy’ from a ‘hold’ rating with a share price target of $84.
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United Overseas Bank
Just like DBS Group, United Overseas Bank has been on an impressive run after headwinds in the last couple of years. The stock has rallied by more than 40% over the last 12 months and is currently flirting with two-year highs. Earnings growth has been the main catalyst behind the stock’s rally.
UOB’s Earnings Growth
UOB reported record earnings for the full year ended December 2017. Net earnings for the full year grew 9% to S$3.39 billion mostly driven by growth in net interest income, fee, and commission income as well as net trading income.
For the fourth quarter, the bank registered a 16% increase in net earnings that came in at S$855 million. However, compared to the third quarter, earnings were down by 3% due to higher operating expenses.
United Overseas Bank ended 2017 with record profits as growth in core business drove net interest income and fees to new highs.
UOB’s growing dividends
Steady earnings growth in recent quarters has seen the company increase its payouts to investors in the form of dividends. The bank has since increased its core payout to 80 cents per annum, up by 12% from 2016. In addition, the bank will pay a final dividend of 45 cents per share for last year and a special dividend of 20 cents.
A total dividend of $1 for last year represents a 49% payout ratio
Said UOB chief executive Wee Ee Cheong: “Despite headwinds in the last couple of years, particularly in the oil and gas sector, our balance sheet remains strong, with robust capitalization and reserves buffer as well as ample liquidity.
An undervalued UOB?
Singapore’s capital market is trading at a price to earnings ratio of 22.53X, which is higher than that of the overall stock market that currently stands at 13.77X. United Overseas Bank, on the other hand, appears undervalued given that it is trading at a lower Price to Earnings Ratio of 16.27X, which is relatively cheaper than that of the capital markets.
UOB’s outlook for 2018
Following the stellar financial results, analysts at RHB have reiterated a ‘buy’ rating on the stock with a share price target of S$30. DBS is also remaining bullish about UOB long-term prospects has initiated coverage with an S$29.50 price target.
Overseas-Chinese Banking Corp (OCBC)
Overseas-Chinese Banking Corp (OCBC) is currently trading at record highs after two years of trading in an uptrend. Just like in DBS Group and UOB, the stock has seen its sentiments improve because of stellar performance on the earnings front.
OCBC’s earnings Growth
OCBC reported fourth-quarter financial results that beat forecasts as net profit jumped 31% to S$1.3 billion. Net profit for the full year grew 19% to S$4.15 billion as earnings per share came in at 97.6 Singapore cents up from 82 Singapore cents a year ago.
Increased Dividends from OCBC
The board of directors has since approved a final tax exempt of 19 cents per share dividend, an increase from 18 Singapore cents paid in 2016. The increase brings the total dividend paid last year to 37 Singapore cents up from 36 cents paid in 2016.
2018 outlook for OCBC
OCBC continues to experience sustained growth momentum across its three business pillars namely banking wealth management and insurance segments. The trend should continue in 2018 as the economy continues to grow at an impressive rate at the back of expectations of interest rate hike, which should lead to more loans interest income.
With risks in the bank’s offshore and marine portfolio comfortably sustained, the bank look set to continue posting impressive financial results catalysts expected to continue pushing the stock up the charts.
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