A reality check on Singapore banks

Photo credit: OCBC Facebook

MAS’s recent announcement calling for the local banks (DBS, OCBC and UOB) to cap their dividend payout to 60% of 2019’s DPU is a cold, hard reality check for bank shareholders, who will now tangibly feel the effects of a Covid-19 recession. One of them is former a ST business reporter:

I didn’t expect that I would be doing an update on my post this morning about Singapore banks’ dividends so soon….

Posted by EngYeow Goh on Wednesday, July 29, 2020

For those who are unable to see the FB post, here is what Mr Goh Eng Yeow wrote:

I didn’t expect that I would be doing an update on my post this morning about Singapore banks’ dividends so soon.

Rather than wait for the half year reporting season to kick off, the MAS has swung into action by telling the local lenders to cap their dividend this year at 60 per cent of last year’s payout.

As an investor, I must be grateful that the cut hasn’t been more painful like in England where the dividend is scrapped completely.

Still, it hurts as I rely on dividends from the banks to give me passive income.

Now, the bigger challenge going forward is whether the Singapore banks will be able to produce enough earnings to pay the reduced dividend.

Ditto the foreign research houses which have been writing bullish reports about The ability of Singapore lenders to keep their dividend payout intact.

So after the great rebound in the past two months, a dose of reality is about to set in as we adjust to the harsh reality of reduced dividend income from our bank shares as they cope with struggling borrowers.

For those wanting to buy bank stocks, it may be the case that a decline to the lows of March may be oncoming. Just this past Tuesday, I put up a purchase order for OCBC stocks. My order wasn’t successful, as my bidding price was below asking price. But the next day, the price fell to my previous day bidding price. I was perhaps fortunate I did not make a purchase order, because the bank stock prices appear precarious.

Low interest rates & bad loans

Our local banks are facing a double whammy of trouble. With the Fed’s rate kept to 0.00-0.25%, our local banks earnings look certain to be hit badly for the time being. This 99.co article explains why:

As Fed interest rates and interest rates in Singapore are highly correlated, the interest rates of floating rate home loans, especially those pegged to the SIBOR, will similarly remain low until the end of 2022.

Royston Yang from The Smart Investor also noted that our banks will likely face “an avalanche of bad loans”. One major example of a bad debtor is Singapore oil trading firm, Hin Leong Trading.

Hin Leong reportedly owes the 3 local banks big money as follows:

  • US$290 million owed to DBS
  • US$220 million owed to OCBC
  • US$100 million owed to UOB

The article says that the amount isn’t substantial, but one has to take into account the barrage of other requests for loan deferments and defaults from Covid-19 – both for mortgages and rental payments from tenants to landlords.

The SG bank stock prices may look tempting, but prospective buyers and current shareholders will likely face rocky times for the forseeable future. For those looking for an entry point, this is probably a good time.

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