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Why Are Bank Stocks In Singapore Cheap Now?

Singapore’s market barometer, the Straits Times Index (SGX: STI), is down by 24% over the last 12 months. Not pretty.

But wait till you take a look at the bank stocks. Singapore’s three main listed banks, namely DBS Group Holdings Ltd (SGX: D05), Oversea-Chinese Banking Corp Limited (SGX: O39), and United Overseas Bank Ltd (SGX: U11), have all seen their shares shed at least 26% in value within the same period. Now that’s ugly.

Thing is, there may be something positive coming out of the decline in bank stocks and that is, they are selling at attractive prices now given their low valuations (the price-to-earnings, or PE, and price-to-book, or PB, ratios) as you can see in the table below:

DBS, OCBC, UOB, share price and valuation table
Source: S&P Global Market Intelligence; banks’ earnings releases; author’s calculations

But before anyone of us invests in the banks, there’s a question that we may want to ask: Why are the bank stocks trading at such low valuations? Getting answers to the question could perhaps give us some important perspectives as to why their prices have declined and if the declines are warranted.

There are three potential reasons that may have caused the sell-off in the banks:

1. Increase in bad debts and provisions for bad loans

With a fall in commodity prices, many related sectors – such as energy and mining – have been badly hit.

For example, oil prices are down from over US$100 per barrel in mid-2014 to around US$30 today. This has caused significant pressure on the businesses of many oil and gas companies, including the likes of giants in the field like Keppel Corporation Limited (SGX: BN4) and Sembcorp Marine Ltd (SGX: S51).

The deterioration in business activities in the oil & gas sector – as well as elsewhere – can cause significant stress to companies in the space when it comes to repaying or servicing their debt obligations. This in turn could drive an increase in the bad debts faced by the banks.

In the fourth-quarter of 2015, DBS had reported a 17% year-on-year increase in allowances for credit and other losses. Meanwhile, the self-same number for OCBC and UOB had jumped by 25% and 14.6%, respectively.

2. Potentially weak economy in the near future

There are signs pointing to weak economic growth in Singapore. In 2015, the nation’s gross domestic product (GDP) grew by 2%, the slowest rate seen since 2009. In 2016, official estimates are for economic growth of just 1% to 3%.

With investors possibly expecting a weaker economy ahead, they might be expecting a poorer performance from the banks.

A weak economy could mean that businesses may reduce their investment activities while consumers may cut their spending on big-ticket items. Both have the potential to drive down lending activity if true. This could reduce business, and in turn, profitability, for the banks.

3. Market is in a depressed mood

In my opinion, the stock market behaves irrationally. This is due to the participation of human beings, who are very prone to exhibiting irrational and emotionally-driven actions.

If we liken the stock market to a person called Mr. Market, he would often swing between two mood-extremes: Depression and exuberance. The bank stocks’ low prices at the moment could just be a manifestation of Mr. Market’s depressive state at the moment.

A Fool’s take

So these are three of the many reasons why which explain the current low valuation for bank stocks in Singapore.

Now, I’m curious to know your take on Singapore’s banks? Let me know your thoughts in the comments section below!

Meanwhile, if you like what you've seen, you can get even more investing insights and analyses from The Motley Fool's weekly investing newsletter Take Stock Singapore. It's FREE, so do check it out here.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.