DBS, OCBC, UOB – Is It Worth Buying Now?

My disclaimer can be found here.

On the USA side, my portfolio dipped because of the financial markets meltdown. I have no short positions and it is very likely my businesses would continue to report record earnings. For that portion of my portfolio, I will leave it aside. 

Coming back to Singapore, I sensed some opportunities. Lately, I have been spending time to read some of the articles on bank stocks. These are the two articles which I really liked:

1. Which Singapore Bank stock to Buy? (DBS, OCBC, UOB) by Yue Sin. Yue Sin went into great details by explaining the net interest margins, revenue growth, net loan growth, net income growth, cost to income ratio, and even return on equity. Those are cornerstones of what differentiates a well-managed bank.
2. DBS vs OCB vs UOB by Louis Koay did something similar but he compared the price-to-book ratios historically and he derived an intrinsic value.

To supplement their articles, let’s add on more details into our local banks.

Price to Book Trend

source: Capital IQ

Drawing from the data,

You could see that among these three banks, DBS was badly hit during the previous crisis in 2008/2009. I haven’t researched on the reasons why but perhaps investors were spooked by its higher than average non-performing loans.

A bank’s main role is to manage credit risks by borrowing from depositors and lending out to their borrowers. Any non-performing loans turned bad means the bank has to fork out its own money to cover the loss.

Between 2009 to 2013, you will realise a pattern where DBS traded at a lower Price to Book than its peers. Finally, around 2013 onwards, it started to trade in line.

Then, from 2018 onwards, DBS had a higher valuation than its peers.

In Singapore, investors tend to prioritise dividend yields over capital appreciation.

Let’s explore their dividend payouts and assess whether it is sustainable.

(RELATED: Sustainability of Dividends)

Payout Ratios of DBS, OCBC and UOB

Source: Investor Relations Website

For dividends,  it is best to rely on the official numbers published by the respective banks, rather than third party websites. For instance, Yahoo Finance displayed DBS’ forward dividend per share as $1.83 as compared to $1.23 shared on DBS’ website.

If one were to buy DBS at $18 today, the forward yield is calculated as 6.8%. ($1.23 / $18)

Since DBS trend is to pay out nearly 50% of their earnings as dividends, it is safe to assume the dividends declared could be maintained in the worst case scenario of 50% drop in earnings.  

Conclusion 

Singapore’s government is the biggest shareholder of DBS. That adds a lot of certainty as compared to OCBC and UOB. Furthermore, Singapore’s government is known to be very proactive in managing the economy of Singapore as well. Having gone through the great financial crisis, our local banks are in a better position to weather through any future crisis.

Now the remaining question lies in… what price should I purchase DBS at?

Sorry to disappoint everyone here, but there is no magical price or perfect timing. After many years of investing, perfect timing happens when you are incredibly lucky. But we cannot interpret our luck as our skills. These are two separate events. 

The old saying of dollar cost averaging even during a recession makes perfect sense. You would never know when the stock market will rebound, and you would never know when the stock market will dip further.  

Since the dividend per share is $1.23, and I aim to get a 7% dividend, I work backwards.

$1.23 / 0.07 = $17.57 will be my first entry point for my CPF. 

Given my CPF is earning 2.5%, 7% dividend is a lot better. It is likely a long term holding unless I can find more appealing growth stocks in Singapore. 

If DBS drops by another 10% or so, I will fire my next tranche of CPF funds into DBS. 

Bonus

I created a simple tool just for my Kelvestor.com readers!

You can access it here.

Once accessed, click on File > Download As and you can start using.

How?

Just simply fill in the yellow portion, select your desired targeted yield and the entry price would pop up! 

Small disclaimer: The earnings (DPS) that you see is based on past year’s earnings. Your eventual dividend yield may vary.

Have fun and enjoy playing with it!

P.S If you enjoyed the post, be sure to share it with your friends! If you’d like me to cover another topic, be sure to let me know in the comments here!