SG banks’ share prices hit record high: How to position for the next move

• Trump’s victory in the US election, combined with strong 3Q24 results, propelled the share prices of Singapore banks to new highs last week.

• All three banks maintained steady net interest income, despite ongoing compression in net interest margins. Their non-interest income saw double-digit growth, driven by strong performances in wealth management, treasury sales, and trading.

• The banks' non-performing loan ratios remained stable near the 1% mark, reflecting resilient asset quality that supports their growth even in a prolonged high-interest rate environment.

• With the banks’ share prices exceeding or nearing our target levels, we believe it may be prudent to take some profits off the table. That said, their solid fundamentals make them strong candidates for long-term holdings.

• Among the three, we favour DBS the most, given its strong earnings capacity and a firm commitment to returning capital to shareholders through dividend growth and share buybacks.

Singapore's three largest banks—DBS, OCBC, and UOB—each saw their share prices hit record highs at the close of last week. Positive market sentiment following Donald Trump's claimed victory in the US presidential election helped fuel an optimistic outlook for the financial sector. More significantly, all three banks reported exceptional 3Q24 earnings, further driving investor confidence.

As a result, OCBC and UOB have seen their share prices rise more than 20% year-to-date, while DBS has experienced a remarkable 39.6% gain (Figure 1). With this surge, DBS and UOB have surpassed our target prices of SGD 40.60 and SGD 32.60, respectively. OCBC’s share price also surpassed our target of SGD 16.40 in the morning on 11 November, though it fell slightly below the target in the afternoon. Given these developments, here is how we recommend investors position their portfolios moving forward.

Figure 1: Singapore banks have posted significant share price growth year-to-date

Robust 3Q24 earnings performance

All three banks delivered robust 3Q earnings, with UOB posting the strongest net profit growth at 16.5% YoY, followed by DBS at 15.0% YoY, and OCBC at 9.1% YoY (Figure 2). The solid earnings performance was primarily driven by a significant increase in non-interest income and lower provisions for loan allowances.

Figure 2: all three banks registered strong net profit growth in 3Q24

The three banks’ net interest margins (NIM) continue to face pressure on a year-on-year (YoY) basis due to the high interest rate environment. However, DBS and UOB managed to achieve modest growth in net interest income (NII), with increases of 2.7% YoY and 1.3% YoY, respectively (Figure 3). While OCBC experienced a slight dip of 0.9% YoY in NII for the third quarter, it still posted a 1.6% YoY growth for the first nine months of the year.

All three banks have demonstrated strong management of deposit costs and effective strategies to reduce their balance sheet sensitivity to interest rate fluctuations. As a result, we expect net interest income to remain stable in 2025. This outlook is further supported by our view that interest rate cuts will likely occur at a slower pace than the market anticipates, especially in light of Donald Trump’s return to the political stage.

Figure 3: DBS and UOB reported growth in NII, despite continued compression in NIM

Non-interest income saw robust double-digit growth across all three banks in the third quarter (Figure 4). Among them, DBS reported the strongest wealth management income growth, surging 55.0% YoY to SGD 609 million. This growth was driven by strong inflows into assets under management and the bank’s success in converting cash into investments. OCBC and UOB also posted impressive gains in treasury sales and trading income, buoyed by strong hedging demand.

Looking ahead, we expect banks to maintain strong fee income growth as Singapore's political stability and favourable policies for family office establishments continue to attract foreign capital. This trend is likely to gain momentum amid rising geopolitical tensions, particularly with Donald Trump’s return to the political stage and growing tensions between the US and China. Additionally, the increasing economic uncertainties will provide further support for trading and treasury income, reinforcing the banks' net interest income streams.

Figure 4: Non-interest income for all three banks saw double digits growth in 3Q24

Overall, we expect Singapore’s banks to maintain resilient net income in 2025, underpinned by stable net interest income and continued strong growth in non-interest income. While the implementation of a global minimum effective tax rate of 15% may slightly impact net profit after tax, we believe the banks are well-positioned to achieve solid organic growth, which should help mitigate the effects of the new tax policy.

Asset quality remains solid

The banks also maintain resilient balance sheets. DBS and OCBC saw their non-performing assets (NPAs) continue to decline on a YoY basis, reaching historically low levels (Figure 5), as repayments, upgrades, and write-offs more than offset new NPA formations. Consequently, both banks’ non-performing loan (NPL) ratios improved, with DBS declining from 1.2% in 3Q23 to 1.0% in 3Q24, and OCBC from 1.0% in 3Q23 to 0.9% in 3Q24. This underscores the two banks' disciplined underwriting practices and the resilience of their consumer and corporate bases, positioning them for healthy growth even in a prolonged high interest rate environment. UOB’s NPAs rose slightly by 0.9% YoY in 3Q24 due to an increase in individual NPA formations, but kept its NPL ratio stable at 1.5%.

Both DBS and OCBC have strengthened their provision coverage ratios to 135% and 164%, respectively, providing a solid buffer against potential losses from impairment risks, whether stemming from domestic or global economic challenges. UOB’s coverage ratio stood at 99%, down 3bps from a year ago but still at a healthy level.

Figure 5: The NPL ratio remained close to the 1% level

Increased capital distributions

Compared to 2023, all three banks have raised their dividends as of the third quarter. DBS led the way with the largest increase, declaring a dividend of 162 cents per share for the first nine months, marking a 36-cent or 28.6% YoY increase from the same period in 2023 (Figure 6). DBS’s Deputy CEO, Tan Su Shan, confirmed that this shareholder-friendly approach will continue under her leadership when she assumes the CEO role in 2025. OCBC and UOB also raised their interim dividends, with OCBC increasing by 4 cents per share and UOB by 3 cents per share. These increases reflect the banks' confidence in their ongoing capital generation and further enhance the attractiveness of their stocks for investors seeking consistent returns.

In addition to these dividend hikes, DBS CEO Piyush Gupta announced a SGD 3 billion share buyback program. Under this initiative, DBS will repurchase shares from the open market and cancel them, which is expected to drive higher earnings per share along with the continued growth in return on equity (ROE), which reached 18.8% as of 3Q24. As of September’s close, DBS maintained a strong CET1 capital ratio of 15.2%, well above the national requirement plus the capital conservation buffer of 9.0%. Even with the buyback, the CET1 ratio is expected to decrease by only 0.8%, remaining at a robust level.

Figure 6: all three banks increased their dividend distributions

Investing in SG banks can yield rewards

With all three banks’ current share prices surpassing or approaching our target prices, we recognise that valuations are becoming stretched, with limited room for capital appreciation in the near term. As such, we believe it may be appropriate for investors focused on capital appreciation to take some profits off the table.  

That said, we continue to view these banks as strong long-term holdings. Their solid fundamentals, supported by robust earnings and resilient balance sheets, are expected to sustain a forward dividend yield of over 5%, offering a reliable income stream.

Among the three, we remain most favourable toward DBS, given its highest ROE, which signals continued potential for shareholder rewards driven by strong earnings performance. Furthermore, DBS's management has demonstrated a clear commitment to returning capital to shareholders, as evidenced by initiatives such as the share buybacks and the one-for-10 bonus issue announced earlier in February - both of which could significantly benefit long-term investors.

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.