The mainstream financial media loves to talk about our local bank stocks. And I don’t deny that these stocks are also my personal favourite.
It’s a question that has been repeated ad nauseum.
“Should I sell DBS Group?”
“What bank should I buy?”
“Do you think banks will keep going up?
And I can understand why.
After all, the three biggest banks in Singapore make up close to 40% of the Straits Times Index (STI). It’s natural for investors to be curious.
And frankly, there’s good reason to do so, since these banks are the key pillars of Singapore’s economy.
So, here’s a good breakdown on the potential growth drivers for our local banks come 2021.
Wealth management poised for strong growth
Singapore is a growing financial hub.
A Deloitte International Wealth Management Centre Ranking in 2018 puts Singapore as the second-largest wealth hub in Asia, behind Hong Kong.
Today, the island city has around S$4 trillion of assets under management. And 76% of it comes outside of Singapore.
According to Asian Private Banker, Singapore will attract wealth within the region at a compounded annual growth rate of 8% through 2021, which is more than twice that of Switzerland over the next three years.
All three local banks are well-positioned to capture this growth.
In fact, DBS Group Holdings Ltd (SGX: D05) is a clear winner. It built its wealth management segment much faster than its peers and is set to take advantage of the growing wealth trend in SouthEast Asia.
Its recent quarterly financial results showed its wealth management business accounts for a third of its total revenues, with wealth management fees alone growing 25% compared to the previous quarter to S$380 million.
Meanwhile, OCBC Bank (SGX: O39), through its Bank of Singapore private banking arm, has also been building its wealth management business. Its latest quarterly financial results showed wealth management fees rose 24% quarter on quarter to S$252 million.
United Overseas Bank Ltd (SGX: U11) has a much smaller wealth management business than its other two peers, but its performance has been strong.
So far, its recent quarterly financial results showed its wealth management segment grew 41% quarter on quarter to S$188 million.
Digitization is inevitable
Forget about the newly-awarded digital banking licenses. The three local banks have already built up their online presence over the last few years.
Here’s the thing, our three local banks have been engaging customers through their smartphones and computers.
And if you noticed, more and more banking services can be done online via a simple mobile App. In fact, we’ve also written something on it here.
DBS has gone to great lengths to incorporate technology infrastructure into its business processes.
And it’s been doing so well that it caught the attention of Euromoney, resulting in DBS being named the “World’s Best Digital Bank”.
What many people may not know is that OCBC Bank has its financial management capabilities uploaded onto its Digital Banking Business platform, known as OCBC Velocity.
This is an app which offers easy access to a wide range of services — from looking at personal cash flows to e-invoicing for your own business. Since June this year, this app has been downloaded over 100,000 times.
UOB Group has also been busy creating its own digital capabilities.
Its mobile app, called TMRW, provides a full range of banking services on your smartphone. The app allows direct access to your savings account and allows you to borrow money with the tap of your finger.
Banks have room for more firepower
Finally, don’t overlook this one final growth driver.
In my opinion, apart from safekeeping people’s money, banks also lend out cash to make sure businesses continue to grow. This lending is what drives Singapore’s economy.
According to the Ministry of Trade and Industry (MTI), while Singapore’s GDP contracted by around 6.5% year over year, the economy is expected to jump back to 4% to 6% growth in 2021.
This growth projection means the government is expecting businesses to pick up, which also means there’s a lot of opportunities for banks to extend loans.
All three banks have a conservative loan-to-deposit ratio of less than 100% — DBS Group at 83%, OCBC Bank at 88% and UOB Group at 77%. Banks still have plenty of firepower to lend out money to businesses.
The loan-to-deposit ratio is a measure of how conservative a bank is based on how much money it lends out from its total pool of deposits.
Get Smart: Watch out for the banks
While the COVID-19 pandemic has given businesses a hard time this year, our three local banks have remained fundamentally resilient.
Singapore may be a small market, but these banks remain the pillar of the country’s economic growth.
Furthermore, the banks’ lending and wealth management businesses have also extended beyond Singapore’s shore and have penetrated into the Southeast Asian region.
For the long-term investor, you might want to keep a lookout for these banks before they roar again.
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Disclaimer: Willie Keng owns shares in DBS Group Holding Ltd.