Following the heightened volatility in global oil markets that saw Brent Crude Oil close above US$120 over two sessions (7-8 Mar), global markets have rebounded. Since 8 Mar, the STI has generated a 6.0% total return, with global bank stocks rebounding 6.5%, and DBS, OCBC and UOB outperforming with an average 10.3% gains.
The combined quarterly Net Interest Income of DBS, OCBC and UOB amounted to S$5.31bil in 4Q21, which was up 3% q-o-q and 5% y-o-y, remaining above S$5.0bil throughout 2020 and 2021 amid low interest rates after peaking at S$5.75bil in 3Q19. Generally banks maintain positive correlations in net interest income to US$ rates & loan growth.
While the Mar 16 FOMC 25bps hike was built into expectations, the week saw CME FedWatch expectations for a target band of 200bps-225bps by the end of 2022 increase to 42% from 17%. This would represent another seven hikes of 25 bps each in 2022.
DBS, OCBC and UOB rank 2nd, 6th and 7th largest weights of the FTSE Developed APAC ex-Japan Sustainable Yield Index which tilts towards the financial and operating strength of stocks with specific emphasis on companies with strong balance sheets and the ability to generate cash flow, rather than extreme high yields.
Amidst inflation concerns, the Ukraine crises and the emergence of the Deltacron variant, global stocks have gained 0.6% over the first three weeks of March, with Asia Pacific stocks declining 1.9%. However, with volatility notching higher, global and regional stocks were down 5.7% and 5.9% respectively in March through to 8 March, before rebounding 6.6% and 4.3% respectively from 8 March through to 18 March. Over these 8 sessions the price of oil has stabilised, after Brent closed above US$120/bbl for the two sessions spanning 7 and 8 March. Nonetheless, this month has thus seen 30-day Straits Times Index (STI) annualised volatility return to +13% levels last seen in August 2021.
DBS Group (SGX:D05), OCBC Bank (SGX:O39) and UOB (SGX:U11) together comprise 45% of the STI. The volatility in early March saw the trio erase their 2022 year-to-date gains, to average flat returns by the close of 8 March. Since 8 March, the trio have averaged 10.3% gains, outpacing global banks which have gained 6.5% over the period.
Since 8 March, UOB, DBS and OCBC ranked 1st, 2nd and 4th respectively among the STI’s strongest performers while drawing a combined S$100mil in net institutional inflows. Total net institutional inflow for the trio is now at S$476mil for the 2022 year through to 18 March, with the trio averaging 10.4% gains.
| Singapore Banks | SGX Code |
2022 YTD Average Daily Turnover |
2022 YTD Net Institutional Flow |
2022 YTD Return |
8Mar-18Mar Return |
10-Year Average Annualised Total Return |
20-Year Average Annualised Total Return |
P/B (x) |
|---|---|---|---|---|---|---|---|---|
| DBS | D05 | $190,106,547 | $24,739,362 | 6.4% | 11.3% | 14% | 9% | 1.55 |
| UOB | U11 | $131,627,469 | $267,271,753 | 19.2% | 13.4% | 7% | 8% | 1.26 |
| OCBC | O39 | $117,362,242 | $183,903,490 | 5.5% | 6.3% | 10% | 8% | 1.03 |
| Total | $439,096,258 | $475,914,605 | ||||||
| Average | 10.4% | 10.3% | 10.3% | 8.3% | 1.28 |
Note: Aside from the significant weightage in the STI, the trio of DBS, OCBC and UOB make up 20% of the total market capitalisation of all stocks listed on SGX, in addition to 20% of the day-to-day turnover.
Source: SGX, Refinitiv, Bloomberg (Data as of 18 March 2022).
Another key development last week that supported the recent gains of the bank stocks was a more hawkish outlook for US interest rates by the end of 2022. The 16 March FOMC rate hike to a 25bps to 50bps band was built into expectations, however the week also saw CME FedWatch expectations for a target band of 200bps to 225bps increase by the end of the 2022. These expectations rose from 17% to 42%. This would represent another seven hikes of 25bps each in 2022, with the FOMC Fed Chair in an answer to Axios’ Neil Irwin inferring there's seven remaining meetings, and there's seven rate hikes to consider, adding that the FOMC hadn’t made any decisions on front-end loading or going steadily through the year.
The Net Interest Income (NII) of the trio of the Singapore banks is general positively correlated to rising US$ rates and future rate rises have been a key part of past and present investor expectations. Loan growth is also a key driver of NII. As maintained by the DBS CEO in Feb, DBS maintains NII sensitivity of S$18mil to S$20mil per basis point of US$ rates. This implies a 25 basis point rise in US$ rates equates to S$450mil to S$500mil of additional NII for the bank. DBS has also seen its proportion of current and savings accounts (CASA) within its total customer deposits grow 17 percentage points over the past two years.
The combined quarterly NII of DBS, OCBC and UOB amounted to S$5.31bil in 4Q21, which was up 3% q-o-q and 5% y-o-y, and remained above S$5.0bil throughout 2020 and 2021 amid the lower interest rates, after peaking at S$5.75bil in 3Q19.
On the valuation front, the average price-to-book (P/B) ratio (which compares company market values to book values) of DBS, OCBC and UOB is 1.28x, which represents a 4% premium to the median of the top quintile (1.23x) to top quartile (1.21x) of global bank peers by market value. This followed the average P/B of DBS, OCBC and UOB rising to 1.40x, a 10%+ premium to the top quintile (1.26x) and top quartile (1.23x) in mid-February when expectations for a higher 50bps hike at the 16 Mar FOMC were as high as 60%.
DBS, OCBC and UOB rank as the 2nd, 6th and 7th largest index weights of the FTSE Developed APAC ex-Japan Sustainable Yield Index which tilts towards stocks not with extremely high yields, but rather the financial and operating strength of stocks with specific emphasis on companies with strong balance sheets and the ability to generate cash flow. Other regionally-listed stocks that rank among the 10 largest constituent weights include Australia & New Zealand Banking Group, Macquarie Group, Commonwealth Bank of Australia, Samsung Electronics, Hyundai Motor, KB Financial Group and CK Hutchison Holdings.
