To The Moon

Singapore’s three major local banks – DBS (D05), OCBC (O39), and UOB (U11) – have shown resilience, rebounding from multi-month lows, only to face renewed selling pressure in recent weeks. Despite their solid fundamentals and long-standing reputations, they are currently navigating a challenging environment marked by several headwinds that continue to weigh on earnings prospects.

Key Earnings Risks Facing SG Banks:

1. Lower Net Interest Margins (NIMs): Following aggressive rate hikes in 2022–2023, central banks globally might now be more likely to pivot towards a more neutral or even easing stance. As a result, NIMs are coming under pressure, especially as the pace of interest rate hikes slows or reverses. This reduces the profitability of lending operations, a core revenue stream for banks.

2. Potentially Sluggish Loan Growth: Slowing economic momentum in Singapore and the broader region may dampen corporate borrowing and consumer loan demand. With economic uncertainty ahead, businesses and individuals may remain cautious in taking up new credit, further limiting top-line growth for the banks.

3. Weaker Wealth Management Income: Market volatility and risk-off sentiment may hurt investor appetite, potentially translating into lower transaction volumes and reduced fee income from wealth management – traditionally an important revenue pillar for DBS, OCBC, and UOB.

4. Rising Competition from Digital Banks: The emergence of digital banks like Trust Bank (by Standard Chartered and FairPrice Group), GXS Bank (by Grab and Singtel), and MariBank (by Sea Group) may gradually erode the traditional banks’ market share, particularly among younger, tech-savvy Singaporeans who might prefer mobile-first platforms and streamlined user experiences. While still relatively small, these players could be disruptive over the long term.

5. Macroeconomic Risks and Recession Fears: With global growth slowing, especially in China and other regional markets, and continued geopolitical uncertainty, there remains a non-negligible risk of recession. In such a scenario, banks could see higher credit impairments, reduced lending activity, and further strain on margins.

Valuations: Attractive or a Value Trap?

On the flip side, valuations of the three major banks have pulled back significantly recently:

• DBS (D05): Closed at $38.13 on Friday, down 3.88%, with a 52-week range of $30.42–$46.52.

DBS Group Holdings (D05.SI)

• OCBC (O39): Closed at $15.01, down 2.72%, with a 52-week range of $12.67–$17.93.

ocbc bank (O39.SI)

• UOB (U11): Closed at $32.47, down 2.23%, within a 52-week range of $27.42–$39.20.

UOB (U11.SI)

Despite these pullbacks, personally, I still feel prices are relatively high – especially when compared to the discounted levels during the COVID-19 market crash in 2020. Back then, investor sentiment was severely negative, and yet the banks managed to weather the storm and recover strongly.

Currently, while the banks continue to offer attractive dividend yields, often in the range of 5%–6%, and are financially strong with solid capital buffers, I remain cautious. In my view, the risk of further price downside in the event of a global economic downturn or earnings disappointment is still present.

My Personal Stance:

At this point, I do not own any shares in DBS, OCBC, or UOB, and I do not plan to initiate positions at current prices. While some investors might see the current weakness as a buying opportunity – especially for income through dividends – I prefer to stay on the sidelines due to the following reasons:

• I believe valuations still have room to fall if macro conditions worsen.

• I am wary of the growing competition from digital banks which may erode traditional banks’ long-term profitability.

• Recession risk remains a serious overhang that could hit banks harder than other sectors.

Final Thoughts:

Singapore banks remain a core part of the STI and are usually regarded as safe, dividend-paying blue-chip stocks. However, investors should weigh the earnings headwinds and macro uncertainties against the tempting dividend yields and strong capital positions. Personally, I’m not convinced that current prices offer sufficient margin of safety. That said, for long-term, income-focused investors willing to ride out volatility, the pullbacks might present gradual accumulation opportunities – but timing and risk management will be key.