I had visited Invest Fair 2016 over the weekend. The event had a segment that featured DBS Group Holdings Ltd’s (SGX: D05) chief executive, Piyush Gupta, and I managed to hear him share his views on his bank and the market.
During the segment, one attendee noted that banking stocks look undervalued to him at the moment. He was wondering what would cause local bank stocks in Singapore to recover and when that would happen.
Gupta was unable to give a definitive answer. But in his reply, he shared what he sees as the three main concerns that investors have with DBS and banks. Given that DBS is Singapore’s largest bank by assets, Gupta’s view may also be of interest to investors in the other local banking juggernauts, Oversea-Chinese Banking Corp Limited (SGX: O39) and United Overseas Bank Ltd (SGX: U11).
Here’s what Gupta shared:
1. Portfolio quality
Gupta thinks investors are worried that there will be hidden bad debts in the bank’s portfolio that could eat away at its earnings and equity. The bank does have exposure to the oil & gas industry, which is mired in weakness now. Only time can address this issue.
2. Regulatory uncertainty
Gupta also thinks that investors are worried about the evolving regulatory environment. If regulators require banks to set aside more capital to cover potential bad debts, then this will mean a lower return for the banks.
3. The negative interest rate environment
Many countries in the world now have negative interest rates. In general, banks are able to make more money when interest rates are high as it allows them to charge borrowers more while maintaining slower increases in deposit interest rates. But when interest rates are negative, banks can’t do the above. Negative interest rates act as a drag on banks’ profits.
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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 Ong Kai Kiat doesn't own shares in any companies mentioned.