• Bank stocks were among the strongest industries of the global stock market in 1H21, outpacing broad global benchmarks, alongside the iron and steel, semiconductor and O&G service industries. DBS, OCBC and UOB averaged 19.0% total returns over the 6 months, in-line with the largest global banks by market value.

• While DBS, OCBC and UOB were recipient to net institutional and net proprietary inflows of S$1.39 billion in 1Q21 and S$468 million in 2Q21, endemic developments, varying outlooks for growth, inflation and monetary policy saw frequent rotation of net inflows to net outflows, and vice-versa, in 1H21.

• Both short term upswings and downswings have placed the FTSE ST Banks Index 5-Day Volatility at highest levels in more than 6 months. As economies draw closer to normalisation in 2H21, recurring rotations are expected to continue, with investors assessing the daily inroads to ‘substantial progress’ and effects on accommodative policies.

Banks Among the Strongest Industries in 1H21

Bank stocks were among the strongest industries of the global stock market in 1H21, outpacing broad global benchmarks, along with iron and steel, semiconductor and the Oil & Gas service industries.

Globally bank stocks were supported by resilient global investing, with expansionary monetary policies supporting stocks and businesses, particularly those stocks that facilitate banking and investing activity. Another driver of the 1H21 outperformance was the 2/10 US Yield curve averaging 130bps in 1H21 compared to 60 bps in the preceding 2H20, with banks generally known to borrow short and lend long.

DBS Group Holdings (“DBS”), Oversea-Chinese Banking Corp (“OCBC”) and United Overseas Bank (“UOB”) were recipient to net institutional and net proprietary inflows of S$1.39 billion in 1Q21 and S$468 million in 2Q21. The trio averaged a 19.0% total return in 1H21, in-line with the median 19.8% return for the 200 largest listed global banks by market value. At the same time the average recovery in price-to-book (“P/B”) ratios has been almost identical to the top quartile of global banks by market value.

As illustrated below, there has been significant correlation in the performances of DBS, OCBC and UOB and the top quartile of global banks by market value.

The trio of DBS, OCBC and UOB have consistently reported more than S$5.0 billion in combined quarterly net interest income for the past three years.

• DBS’ 1QFY21 (ended 31 Mar) quarterly net profit crossed S$2 billion for the first time in its history, maintained by the bank to be underpinned by strong business momentum and stabilising asset quality.
• OCBC noted its 1QFY21 (ended 31 Mar) saw a robust set of results, underscored by the strength and resilience of its banking, wealth management and insurance franchise.
• UOB highlighted its 1QFY21 (ended 31 Mar) saw a solid rebound in results, on the back of broad-based growth across the diversified franchise.

For the year ahead, the combined focus of the trio include increased digitalisation, broadening wealth management services, and a continued focus on supply chains and growth markets.

While the Singapore banks average a 15% premium to their book value, their P/B’s remain well off the 40% premium observed back in April/May 2018. For those P/B’s to be around the 1.40x level again, much will depend on the economy as did the valuations in 2017 which saw Singapore among the strongest advanced economies across the globe that year, and also home to one of the strongest performing stock markets across the globe for that year.

Eventual Monetary Policy Normalisation Provides Potential for More Swerves and Curves in 2H21

The short-term volatility of DBS, OCBC and UOB as gauged through the short-term 5-day historical volatility of the FTSE ST Banks Index has consistently gyrated between near 30% highs and 5% lows throughout 1H21. This has provided for more short-term trading activity, and stock rotations.

As detailed in the June 15-16 minutes of the Federal Open Market Committee (“FOMC”), participants had diverse views on the economic outlook, particularly in terms of growth and inflation. Following the meeting, the Fed Chair made a point of noting that dot plots are the result of ‘individual projections, not a Committee forecast’ and ‘not a plan’. Nevertheless, the different expectations of the FOMC Committee Members, current and future Alternate Members have the potential to provide for increased volatility in both yield curves and the global banks sector. Furthermore, Fed members may seek more airtime to share their individual outlooks given that the Fed Chair has made a commitment to provide as much transparency on tapering that it can give and as far in advance as possible to give the market a chance to adjust their expectations.

The dot plot surprise in the 15-16 June Federal Open Market Committee (“FOMC”) saw seven of 18 members expecting a rate increase in 2022, moving the yields on 2-year UST from 0.16% to 0.26% (which have since returned to 0.21%). Between 16 June and 29 June, the 2/10 US yield curve flattened from ~135 bps to ~120 bps. With added hawkish comments by Fed members, the week through 23 June, EPFR Global saw the largest outflow for financials since March 2020.

Between 16 June and 29 June, DBS, OCBC and UOB saw close to S$350 million of net institutional and net proprietary outflow, averaging a 3.1% decline. The next session, saw end of quarter balancing indicate institutional investors had broadly added to their Singapore exposures, with the trio averaging a 2.0% gain with more than S$60 million of net institutional and net proprietary inflow. This served a timely reminder that the local economic outlook and portfolio country weightings are also key drivers of DBS, OCBC and UOB, which are also the three largest weightings of the STI. The greater amplitude in price swings has seen the short term 5-day historical volatility of the FTSE ST Banks Index increase to above 30%, its highest level in more than 6 months, and up from the 14% average over 1H21.

2H21 Sees Daily Trading Activity in DBS Shares Up 6% from 1H21

In the month of July through to 8 July, DBS shares have seen increased turnover, contributing 57% of the combined S$256 million in average daily turnover of the bank trio, with the difference evenly divided between OCBC and UOB. This compares to DBS comprising 49% of the combined S$278 million average daily turnover of the trio in 1H21, with the difference again evenly divided between OCBC and UOB. Over the first 6 sessions of July, DBS average daily trading turnover was S$144 million, compared to S$136 million in 1H21. The table below summarises the recent performances of the 3 banks. As detailed in the table, the average intraday trading range of DBS in the first sessions of 2H21 was 47 cents.

Source: SGX, Bloomberg, Reuters (Data as of 8 July 2021)

While DBS, OCBC and UOB trimmed FY20 dividends to 60% of FY19 levels to bolster ability to serve credit needs and absorb potential shocks, DBS, OCBC and UOB also remain amongst the top 10 constituents of the FTSE Developed Asia Pacific ex-Japan Sustainable Yield Index. Global Finance Magazine also ranked the three banks Asia’s safest banks again for 2020.

OCBC and UOB will both report 1HFY21 results before the market open on 4 August, while DBS will report on 5 August.