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Home Kuo’s Smart Take Smart Thought Of The Week: Banks

Smart Thought Of The Week: Banks

The bank earnings season is now over. Pretty decent, considering.

Full-year profit at DBS Group (SGX: D05) fell for the first time in four years – income declined 26%. Meanwhile, UOB (SGX: U11) said annual profit was down by a-third from a year ago.

Singapore’s other listed bank, OCBC (SGX: O39), said profit dropped by nearly a-quarter for the full year. Over in Malaysia, the country’s biggest lender, Maybank (KLSE: 1155), reported a 21% drop in full-year profit, whilst Public Bank (KLSE: 1295) said annual profit declined around 12%.

Elsewhere, HSBC (LSE: HSBA) posted a 34% fall in full-year earnings, and Standard Chartered (LSE: STAN) registered a 57% fall in annual earnings.

So, banks made less money last year compared to the year before. No real surprises there. In case anyone has been living under a rock, COVID-19 brought the global economy to a virtual standstill in 2020.

We could, if we wanted, trawl through their accounts forensically to identify why profits have fallen. But to even be able to make a profit under those horrific conditions is quite an achievement in itself.

So, what is it that we need to know?

Net-interest income was crimped by a narrowing of the net-interest income. That’s because central banks around the world have slashed interest rates to virtually nothing.

There were some provisions for bad debts, but nothing too awful. What were we expecting? Banks lend money. That’s one of the main ways they make profit. Some of those loans can sour. And in recession, there is a greater chance of that happening.

If we are bank investors, then we simply must accept that these financial juggernauts go through cycles. They are, after all, at the forefront of the economic cycle….

…. They can make exceptional profits when the economy is booming, and they might make less profit (and possibly losses) when the economy is sagging.

That’s just the way things are. Over the long term, though, well-run banks should continue to reward shareholder. We need to ride the rough with the smooth. We just need to be patient.

Interestingly, the best time to buy banks is when they are on the ropes. That is also the time when not that many investors want to own their shares. That’s not being contrarian for contrarian sake. That is just buying something that has good long-term prospects when it is cheap.

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David owns shares in all the banks mentioned.