Sunday, September 25, 2016

Singapore Banks: Part 1


I'm looking at he local Singapore banks, as some are trading below book value and at single digit PEs, due to fallout from the local O&G industry and fears of a China slowdown.

I've always avoided banking and finance companies due to their performance in the 2008 crisis.  Basically I had the idea that they are all black boxes, stuffed full of derivatives, bad loans and 3-letter acronyms, who would report rising profits for years, before one-day turning around and writing them all off.   Like this:

The counterpoints are that:
  • In many countries, banking is an oligopoly, with the top 3-4 players having 50-75% of the market.  They are still price competitive, but new entrants are limited.
  • Banks provide a large amount of detail about their loan book (aggregated by industry, country, percentage of loans secured, etc).  As well as Non-performing loans (NPLs) which are decided by objective criteria.
  • We can see their long-term history of write offs and NPLs - a bank that was conservative in the past is likely to be so in the future.  Corporate culture does not change quickly.
  • The cost of funding (deposits) is known and provides a distinct competitive advantage for some players.  Cheap money.

Learning about Banking

I haven't found any single, complete book on "Analysing bank stocks for idiots and value investors".  Rather there were many online sources and examples:
I'll start with the Singapore banks since I live there, but I want to use the same steps for other countries.

Market Share

Most countries have a "big four" handful of banks that dominate the local market and are backed by the government as 'too big to fail'.  Singapore has 3.  Before investing in a country's banks, we want to see how competitive the market is.  A simple measure of market competition is the market share that these banks have for:

  • Home loans.  Best I could find is a report showing the big 3 local banks had a 63% market share in 2013.  Standard Chartered and HSBC are the only other significant competitors.
  • Deposits.  A Moodys Report gives says the 3 major banks had 60% of deposits at end 2012  (p13).
What do I expect in the future?
  • I think that the Singapore banking market has become more competitive for deposits after it was liberalised in the 2000s.  But from the above chart, not yet for loans.  
  • I don't think it will become less competitive: I can't imagine any of the ten Qualifying Full Banks packing up and leaving in the future.  And if they do, they'll probably just be taken over.
  • Government savings schemes, such as Singapore Savings Bonds or CPF Life could provide competition for deposits.  Though Singapore Savings Bonds seem to be dying.
So going forward I expect either the same or more competition.  Especially if more of the Qualifying Full Banks can achieve scale.  I don't see less competition.

Non-interest Income

I start by looking at a bank's non-interest income, for two reasons:
  1. I am looking for banks that do 'traditional' banking: the simple collection of deposits and lending them out.  We don't want banks where the majority of income is from complex, risky activities like investment banking, or worse still - derivatives trading.
  2. Although banks try to generate fee-based income from other activities to 'smooth out' credit cycle fluctuations, these earnings are often still subject to the same cycle.  Or may be highly volatile, year-on-year.  So these earnings should be discounted a bit when looking at PEs.

Categorizing Non-Interest Income

The Singapore banks' non-interest income has been built up over the years and now accounts for 30-40% of their income.  Lets look at the different categories of non-interest income to see whether we can spot any long term trends, and check if they are cyclical.

Loan Income and Trade Related income have grown steadily, and were not affected by the 2008 downturn.  I would categorise this as "Steady Growth":

Credit Card income surprisingly grew steadily for DBS and UOB, only OCBC's dropped after the GFC.  I'll put this under the "Steady Growth" category too:

Trading Income1 has grown tremendously since the GFC, but is highly volatile - it can rise or fall 20-50% a year.  I've put OCBC's bancassurance income here too as it correlates so closely to the Trading income2 .

Fund management, Wealth Management and Investment Banking are less volatile, but highly cyclical, dropping 50% of more during the GFC:

"Services and Other Fees" is also quite cyclical, surprisingly:

For simplicity, I'll put the last last 3 items under a "Volatile or Cyclical" category.

So now we have 2 categories of non-interest income: "Steady Growth" and "Volatile or Cyclical".

Interest vs Non-Interest Income

Lets compare the interest income and categories of non-income for each bank:

As percentages:

30-40% of all 3 banks' income is from non-interest sources (red and blue above).  How did it fare during the financial crisis?

  • In 2009, UOB's non interest income dropped 20%.  
  • In 2008 and DBS' non-interest income dropped by 13%.   
  • In 2008, OCBC's non-interest income dropped by 42%.
BUT, interest income did not drop - it actually rose. The drop in profits came from write-offs, which are not included here.


  • 30-40% of all Singapore banks' income is from non-interest sources
  • Non-interest income for the Singapore banks has been cyclical and/or volatile.  More than interest income.  It fell 13 to 42% in the previous downturn.
  • So I'd factor in a 5 to 16% drop in total earnings (from non-interest earnings alone) if we were expecting a crisis.
  • Interest income - excluding write-offs - was pretty steady during the crisis. Maybe because the crisis was so short.
  • This is all excluding write-offs, which I'll look at next.
1 Mostly forex
2 Thats to be expected, as insurance makes money by investing their float. But, I think they would invest in stocks and bonds, not trade forex.

No comments: