How to trade Singapore bank stocks
The trio of Singapore banks takes up the lion’s share on the local Straits Times Index, correspondingly affecting the movements of the index. Look to what drives the movements for these bank shares.
What are the three major listed banks in Singapore?
DBS Group Holdings Ltd (DBS) is one of the largest banks in Asia, headquartered in Singapore with over 280 branches spread across 18 markets. The bank had originally been set up as The Development Bank of Singapore Limited by the Singapore government to handle the industrial financing activities for the Economic Development Board before becoming a commercial bank.
As expected, the bank has a majority exposure to Singapore with Hong Kong and greater China coming in next. In terms of segment, the bank finds varying contributions from its consumer banking, institutional banking and treasury segment towards revenue. With most of its lending business situated within Singapore and the country a price-taker in terms of interest rates, these are the key factors contributing to DBS’s performance. The bank had also taken a rather aggressive stance towards its digital transformation in recent years.
Oversea-Chinese Banking Corp Ltd (OCBC) is Singapore’s oldest bank formed from the merger of three local banks in 1932. Akin to DBS, the bank is highly rated by ratings agencies and regarded as one of the safest banks in the region. OCBC’s business also spreads across Asia, mainly covering Singapore, Malaysia, Indonesia and Greater China markets. Bank of Singapore and Great Eastern Holdings serves as OCBC’s private banking arm and insurance subsidiary respectively while Lion Global Investors is the bank’s asset management subsidiary. As with the above, the bank is susceptible to largely the same factors as DBS in terms of exposure though compared to peers, OCBC has a largely higher profit derived from overseas operations.
United Overseas Bank Ltd (UOBH) was incorporated in 1935 as the United Chinese Bank before changing its name in 1965. As with DBS and OCBC, the bank provides financial services across its global network of offices primarily within Singapore, Malaysia and greater China. Compared to peers, however, the bank evidently holds a greater exposure to the Singapore market. As noted by the bank, it is a market leader in the credit card and private residential home loan business, the latter a significant proportion the local retail lending.
How to trade UOB, OCBC, DBS bank stocks
There are a wide array of factors affecting the movements of bank stocks. To learn about the price fluctuations of any company, it is crucial to know how the business makes money. Banks as we traditionally know, is engaged in the business of lending, whether this is across retail or commercial lending. A portion of the banks’ revenue can also come from trading and this may be more significant a percentage than lending income for investment banks such as Goldman Sachs or Morgan Stanley in the US. The big three local banks in Singapore, however, have a significantly smaller share of trading income accounting for their revenue than say the likes of Goldman Sachs. Below is a list of items to look out for in driving movements for local banks shares. It is by no means exhaustive but identifies some of the key items to watch.
Global growth impact on loans
The business of lending itself meant that the demand for credit would play a key role in determining the interests and the fees a bank collects. To a large extent, the macro growth picture guides this demand whether we are talking about companies’ risk appetite and views of their growth potential or the individual consumer spending. In addition, the ability to repay the sum borrowed would also be critical for banks as we have learnt from past financial crisis such as the case of the mortgage crisis in the US in 2008. Therefore, bank shares find strong relevance from the growth situation. Some of the ways to track these includes the GDP figure, or high frequency releases such as loan growth itself in Singapore. These numbers, in turn, would be ones to move the market whereupon surprises or disappointments have been noted.
Specific sector performance also affects banks in accordance to the exposure the bank takes, such as the huge write-down seen by local banks around 2017 after the marine and offshore sector dismayed. The substantial exposure of local banks to the Greater China region would also mean that growth in the area would affect the bank’s shares. This is one reason contributing to the downturn in the local stock market as the US-China trade dispute broke out in 2018.
Interest rates and net interest margins (NIM)
Bank earnings typically improves within a rising interest rates environment, no surprise as this would mean higher interest rates charged upon loans. As a price-taker, Singapore banks find its short-term interest rate a function of the Singapore inter-bank offered rate (SIBOR) which itself is affected by the Federal Reserve’s interest rates. As such, the Federal Open Market Committee (FOMC) meetings plays an important part in affecting the net interest margin (NIM) outlook for local banks. NIMs serve as a measure of the difference between the income generated and costs on interest earning assets relative to its total amount and hence representative of the banks’ profitability.
To a large extent, the earnings outlook from the bank management will shape investors’ conviction. This typically arrives alongside the earnings results announcement. More than how the macro picture shapes up for revenue growth, oftentimes a company’s management of their costs and growth strategies will be a key factor for fluctuations in bank shares. This can create the difference in how the big three banks rank against each other.
Trading UOB, OCBC, DBS earnings result announcement
With the above said, the biggest events for trading bank shares are perhaps the earnings result announcements. One would typically find the trio of bank earnings arriving within a week of each other. A strong correlation between the bank earnings means that the first of releases could see a corresponding reaction across the sector. Differentiations nevertheless may be seen thereafter as suggested above, with the earnings outlook affected by various factors.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
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