Bank Earnings Comparison 1H2016 October 26, 2016

It is Q3 earnings season again. Analysts are working overtime to churn out their reports within the next few days while market participants stay up-to-date on recent earnings to determine the fair value (in their personal opinion) of each company.

Our local Banks, DBS, OCBC and UOB, seem to hold a special place in investors’/traders’ hearts as a result of their high market capitalization or earnings capabilities, or simply because their services are something that we use on a daily basis. Banks seem to be one of the market participants’ top focuses and this is no surprise as bank earnings are an indication of growth within the nation and determines spending in general which can come in the form of business expansion, buying properties or a growing population. Spending and inflation encourages more loans taken up which in turn benefit bank’s earnings.

Earnings

Banks in general earn in two segments: Net Interest Income (NII) and Non-net interest income (Non-NII).

NII – Consists of interest earned from loans being issued to businesses and consumers in different sectors and geography
Non-NII – Consists of transaction fees, service charges, inactivity fees, commission and investment/trading income etc

In the last 3 quarters, the 3-month Interbank Offer Rate (SIBOR) declined from 0.932% to 0.873%, while the 3-month Swap Offer Rate (SOR) fell from 0.81% to 0.726%. This in turn affects variable loan yields as they will be repriced to the lower benchmarks. This will affect NII earnings, which still makes up a majority of bank earnings, at 60% or more.

SIBOR vs SOR

Source: http://www.moneysmart.sg/home-loan/sibor-vs-sor-trend

Based on net interest margin, DBS leads the pack, but with recent debt restructuring of Ausgroup, Marco Polo Marine and the recent happenings of Swiber, we may see some downward pressure on that. With UOB having the least amount of China and O&G loans, we start seeing more analysts with buy calls on UOB due to their conservative approach. If you believe that China will slow down further, UOB would be a safer choice, considering they have the highest SGD denominated loans as well.

DBS (1H16) OCBC (1H16) UOB (1H16)
Net Interest Margin (NIM) 1.86% 1.71% 1.73%
Non-Performing Loan (NPL) 1.10% 1.10% 1.40%
Exposure to Greater China (Based on Loans) 29.61% 23.99% 11.48%
Exposure to O&G (Based on Loans) 6.59% (Excludes Swiber) 6.13% 4.38%
Capital Adequacy Ratio 16.30% 17.50% 15.90%
Leverage Ratio 7.70% 8.20% 7.40%
Loan/Deposit Ratio 91.80% 82.20% 84%

Valuation

BankShare Price CAA 21/10/16P/B RatioP/E RatioDividend Yield

UOB 18.82 0.97 9.75 3.72%
OCBC 8.49 0.99 9.83 4.24%
DBS 15.03 0.89 8.77 3.99%
STI ETF 2.88 1.19 11.91 3.23%

The banks’ current valuations are extremely close to each other and discounted to STI ETF, with DBS leading the pack with regards to discount, which is no surprise due to their higher exposure to O&G. However, if you are a value investor and feel satisfied with a 4% region yield, banks does seem attractive. The question we need to ask ourselves is where will the growth be coming from? And on top of earnings and valuation, we still need to consider liquidity, asset quality and solvency risks.

Q3 Earnings Release Dates

BankQ3 Earnings Release Dates

UOB 28/10/16
OCBC 27/10/16
DBS 31/10/16

I would definitely be looking out for banks’ earnings this quarter due to the shakeup in Singapore O&G Sector. I do see some decline in asset quality which may lead to a pickup of non-performing loans and provision. Furthermore, we see slow growth economy and a chance of further weakness, therefore it is no surprise that the risk of banks will increase. A possible hope for the banks might come in the form of Non-NII earnings as there might be more activity Post-Brexit.

However, in my personal opinion as a value investor, the stock market has been transferring money from the impatient to the patient. I would remind our readers to look beyond the noise and be objective.

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About the author

Sky Kwah Wen Yao
Dealing Manager
Raffles Place & Marine Parade Dealing Team

Sky Kwah is part of the POEMS Equity Dealing Team that provides dealing services to over 28,000 trading account customers.

Sky gives talks in tertiary institutions like NTU & SIM and he often conducts seminars on Fundamental Analysis, most recent was at the Investfair 2016. He particularly focuses on value stocks in Singapore and the US with a top-down macro approach. He is frequently interviewed by MediaCorp News 938Live radio station or 联合早报 as a market commenter and he hopes to help clients become better stewards of wealth and believes in succeeding in what truly matters – the fullness of life.

Sky holds a Bachelor Degree of Commerce with a triple major in Financial Accounting, Investment Finance, and Corporate Finance, from the University of Western Australia.