DBS Comes Off The Boil

DBS_Bank_Logo.svgSingapore’s banks are down significantly from their recent highs. It seems that our local financial institutions have not escaped the stock market sell-off as the Straits Times Index (SGX: ^STI) beat a 5% retreat from a high of 3,454 points on 22 May.

United Overseas Bank (SGX: U11) has slipped 7% to $20.62 from a peak of $22.10, while Overseas-Chinese Banking Corporation (SGX: O39) is 7.5% lower at $10.37 compared to its 52-week high of $11.20. Meanwhile, DBS (SGX: D05) is off 7% from a high $17.90 on 10 May.

It would appear that banks have wobbled on concerns that interest rates may rise if the US Federal Reserve chief stops pumping cheap money into the American economy. That money has also found its way into other parts of the world, including Singapore.

The worry is that if interest rates go up, banks may not make quite as much money as they have done in the past.

What’s interesting, though, is that money tightening in the US may be a sign that the American economy is slowly returning to normality, which is what most of us would like to see. After all, we can’t continue to feed on a diet of cheap money forever.

So rather than wobble in sympathy with the market, now might be a good time to step back and take a closer look at those unloved banks. Currently, Singapore’s three main banks yield between 2.9% and 3.3%. And in the case of OCBC, its dividend has grown at a rate of 3% annually over the last 5 years.

But here’s the main reason for taking another look at banks. When times are hard, banks could get hit. But when the economy strengthens, banks could make money.

So, if you believe interest rates might rise because the global economy is recovering, then that could a good reason to look at banks. But if you believe the pace of the global recovery may stutter and interest rates might stay low, then that could be good news for banks too.

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